Question

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 site. Assume that during a recent fiscal year, ESPN spent $4,200,000 on a promotional campaign for the ESPN website 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 14 months(including the two free months) Revenue per month per customer subscription $10.00Variable cost per month per customer subscription $5.00Determine 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.accounts

Answer 1

Answer:

The revenue per customer is computed as:

Revenue per customer = $10 × 12 months'

Revenue per customer = $120

Thus, the revenue will be earned for 12 months.

The variable cost per customer is computed as:

Variable cost per customer = $5 × 14 months

Variable cost per customer = $70

The variable cost will be incurred for 14 months.

The quantity of new client accounts expected to earn back the original investment on the expense of the special crusade is determined as:

Break-even customer = Fixed cost  / Contribution margin per customer

Break-even customer = Fixed cost  / (Revenue per customer - Variable cost per customer )

Break-even customer = $4,200,000 / ($120 - $70)

Break-even customer = $4,200,000 / $50

Break-even customer = 84,000 customers)

In this way, the quantity of new client accounts expected to earn back the original investment on the expense of the limited time crusade is 84,000.