A cell phone company has a fixed cost of $1,500,000 per month and a variable cost of $20 per month per subscriber. The company charges $39.95 per month to its cell phone customers. (2.2) a. What is the breakeven point for this company? b. The company currently has 73,000 subscribers and proposes to raise its monthly fees to $49.95 to cover add-on features such as text messaging, song downloads, game playing, and video watching. What is the new breakeven point if the variable cost increases to $25 per customer per month? c. If 10,000 subscribers will drop their service because of the monthly fee increase in Part (b), will the company still be profitable?

a. The breakeven point is 75,188.

b. The new breakeven point is 60,120.

c.  If 10,000 subscribers will drop their service because of the monthly fee increase, the firm will still be profitable.

The formula used to determine breakeven point is : Fixed cost / (price - variable cost)

Initial breakeven point = $1,500,000 / ($39.95 - $20)

$1,500,000 / $19.95 = 75,188

New breakeven point = $1,500,000 / ($49.95 - $25)

$1,500,000 / $24.95 = 60,120

Profit = total revenue - total cost

Total revenue = $49.95 x 63,000 = 3,146,850

Total cost = $1,500,000 + ($25 x 63,000) = 3,075,000

Profit = 3,146,850 -  3,075,000 = $71,850

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a. Break-even point = Fixed Cost divided by Contribution per unit

= $1,500,000/$19.95

= 75,188 subscribers

b. New break-even point = $1,500,000/$24.95

= 60,120 subscribers

c. Subscriber base = 73,000

less dropped subscribers 10,000

adjusted subscribers = 63,000

The company will still be profitable because it will break-even with 60,120 subscribers.  The excess 2,880 (63,000 - 60,120) subscribers after the break-even point of 60,120 will cause the company to make  some profit.

Explanation:

a) Data and Calculations:

Fixed cost = $1,500,000 per month

Variable cost $20 per month per subscriber

Charges to customers per month $39.95

Contribution = $39.95 - $20 = $19.95

New variable cost = $25

New monthly charge = $49.95

Contribution per unit = $49.95 - $25 = $24.95

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