EX 21-15 Break-even analysis

Media outlets such as ESPN and Fox Sports often have Web sites that provide in-depth coverage of news and events. Portions of these Web sites are restricted to members who pay a monthly subscription to gain access to exclusive news and commentary. These Web sites typically offer a free trial period to introduce viewers to the Web site. Assume that during a recent fiscal year, ESPN.com spent $2,500,000 on a promotional campaign for the ESPN.com Web site 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) 12 months
Revenue per month per customer subscription $10.00
Variable cost per month per customer subscription $6.25


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.


Answer:
The cost of the promotional campaign is the fixed cost in this analysis, since we’re trying to determine the break-even adoption rate of the campaign.

The contribution margin earned per new subscriber is essentially the revenue earned less the variable cost over the 12-month subscription period.

Revenue: (12 mos. – 2 free mos.) × $10/mo. = $100 per new account
Variable cost: 12 mos. × $6.25/mo. = $75 per new account

Note: The variable cost is for 12 months since the costs are incurred, even during the free months.

The break-even number of subscribers necessary to cover the fixed cost of the promotion would be computed as follows:


Break-Even = Fixed Costs
Contribution Margin per Unit
Break-Even = $2,500,000
$100 – $75 = 100,000 accounts



Therefore, if ESPN.com yielded more than 100,000 new subscribers out of the promotional campaign, the costs of the campaign would be covered.