Exercise 2: Breakeven, Crossover Analyses

 

You wish to start a business offering Internet services, and can charge your subscribers $20 per month. You can rent space for $2,000/month, lease the equipment for $40,800/year, and hire enough help center employees to provide three people to answer help calls around the clock. Each employee is paid $10/hour.  Your alternative would be to subcontract the business to ISPs-R-Us for a monthly equipment charge of $4,000 and fee of $13/month per subscriber.  All other incidental costs (including billing) would average about $2/month per subscriber for both options (ISPs-R-Us and You). Assume an average 30-day month.

 

1.  Using the following table, enter the monthly cost associated with each variable and label it as fixed (F) or variable (V).

 

	F/V	ISPs-R-Us	You
Equipment charge	F	4,000/month	40,800/12 = 3,400/month
Subscriber fee	V	13/month	N/A
Call center employees	F	N/A	3*10*24*30=21,600/month
Rent	F	N/A	2,000/month
Incidentals	V	2/month	2/month

 

The above assumes that if you subcontract, you do not need to lease any space or have any employees of your own.

 

2. Showing all calculations, what is the number of customers PER MONTH required to break even with ISPs-R-Us?

 

Let X be the number of customers.

Revenue = 20X

FC=4,000

VC = 15X

Profit = 5X-4000

At Breakeven, 0=5X-4000

Hence, X=800 customers

 

 

3. Showing all calculations, what is the number of customers PER MONTH required to break even if you do it on your own?

 

Revenue= 20X

FC = 27,000

VC = 2X

Profit = 18X-27000

At breakeven, 0=18X-27000

Hence, X=27000/18 = 1500 customers

 

4.  At and above what number of customers PER MONTH should you choose to “go it alone” and not subcontract the business?  (Show all calculations.)

 

At crossover, 5X - 4000 = 18X - 27000

Therefore, 13 X = 23000,

Or, X = 23000/13 = 1769.23, or, rounding up, 1770 customers.

Thus, if you have 1770 customers or more, it makes sense to go it alone and not subcontract.