The America Online division of Time Warner has fueled its growth by using aggressive promotion strategies. One of these strategies is to send compact disk software to potential customers, offering free AOL service for a period of time. Assume that during a given promotional campaign, AOL mailed 3,200,000 disks to potential customers, offering three months’ free service. In addition, assume the following information:
Cost per disk (including mailing) ………………………. $1.50
Number of months an average new customer stays
with the service (including the three free months) ……. 30 months
Revenue per month per customer account ………………. $10.00
Variable cost per month per customer account ………….. $1.00
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 mailing the disk as a fixed cost, and
(2) Treat the revenue less variable cost per account for the service period as the unit contribution margin.
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