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Calculate the one-year breakeven sales level

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Question - The Protect-All home-security alarm service currently charges $200/year for its home-alarm services. They are opening up a new market area for their services, which contains approximately 5,000 homes. They estimate that at the $200/year price, they would obtain 250 new customers in this area. Their contribution margin for this service is 60%.

(a) If the managers offer a one-year introductory discount of 50% off, calculate the one-year breakeven sales level for this price decrease.

(b) Assume that after the first year, 60% of the new customers will subscribe to the service at its full price ($200/year) and for 5 years after that, these customers will show an 80% retention rate. Given these estimates, calculate the CM adjustment for customer lifetime value for the 5-year planning horizon.

(c) Given your calculations for Part (b), revise your calculation of the one-year breakeven sales level for this price decrease. Explain how this revised calculation can help the company's managers decide whether to offer the 50% one-year introductory discount.

Reference no: EM133160109

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