Question

break-even analysis

media outlets such as espn and fox sports often have websites that provide in-depth coverage of news and events. portions of these websites are restricted to members who pay a monthly subscription to gain access to exclusive news and commentary. these websites typically offer a free trial period to introduce viewers to the websites. assume that during a recent fiscal year, espn.com spent $4,200,000 on a promotional campaign for the espn.com websites that offered two free months of service for new subscribers. in addition, assume the following information:

number of months an average new customer stays with the service (including the two free months): 14 months
revenue per month per customer subscription: $10.00
variable cost per month per customer subscription: $5.00

determine the number of new customer accounts needed to break even on the cost of the promotional campaign. in forming your answer, (1) treat the cost of the promotional campaign as a fixed cost, and (2) treat the revenue less variable cost per account for the subscription period as the unit contribution margin.

Explanation:

Identify fixed cost and subscription parameters

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Calculate unit contribution margin per account

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Calculate break-even number of accounts

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Answer:

Determine the number of new customer accounts needed to break even on the cost of the promotional campaign. In forming your answer, (1) treat the cost of the promotional campaign as a fixed cost, and (2) treat the revenue less variable cost per account for the subscription period as the unit contribution margin.
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