Memo 4 To: Pricing Manager, Tri State Region From: Regional Vice President, Tri-
ID: 1109821 • Letter: M
Question
Memo 4 To: Pricing Manager, Tri State Region From: Regional Vice President, Tri-State Region Re: Revenue from EPIX As you are aware, we recently added the EPIX Movie Channels as part of a new tier of programming for our digital video subscribers. The EPIX channels are sold as an add-on package for $9.75 per month, but we would like to potentially increase our contribution margin from our subscriber base. Currently we have 15,059 subscribers, generating monthly revenue of $146,823. In an earlier study, our marketing department generated data on sales quantities at various price levels. In addition, we have included the licensing cost as well as regional expenses. Please provide a recommendation of the profit-maximizing price, and how much our profits will increase if we adjust price to the recommended level. Also, please note whether this will impact our revenue.
Price
Number of Subscribers (Thousands)
Cost of License Fees (Thousands)
Divisional Sales, General and Administrative Costs (Thousands)
$5.00
29.974
$ 134.883
$ 14.50
$5.50
29.256
$ 131.651
$ 14.50
$6.00
17.822
$ 80.199
$ 14.50
$6.50
22.657
$ 101.956
$ 14.50
$7.00
19.897
$ 89.537
$ 14.50
$7.50
16.671
$ 75.017
$ 14.50
$8.00
20.492
$ 92.213
$ 14.50
$8.50
20.000
$ 89.998
$ 14.50
$9.00
19.760
$ 88.920
$ 14.50
$9.50
17.123
$ 77.053
$ 14.50
$10.00
12.644
$ 56.896
$ 14.50
$10.50
12.785
$ 57.531
$ 14.50
$11.00
12.216
$ 54.974
$ 14.50
$11.50
13.246
$ 59.608
$ 14.50
$12.00
8.637
$ 38.867
$ 14.50
$12.50
10.595
$ 47.678
$ 14.50
$13.00
5.857
$ 26.357
$ 14.50
$13.50
2.615
$ 11.768
$ 14.50
$14.00
2.739
$ 12.326
$ 14.50
$14.50
5.291
$ 23.809
$ 14.50
$15.00
3.051
$ 13.730
$ 14.50
Price
Number of Subscribers (Thousands)
Cost of License Fees (Thousands)
Divisional Sales, General and Administrative Costs (Thousands)
$5.00
29.974
$ 134.883
$ 14.50
$5.50
29.256
$ 131.651
$ 14.50
$6.00
17.822
$ 80.199
$ 14.50
$6.50
22.657
$ 101.956
$ 14.50
$7.00
19.897
$ 89.537
$ 14.50
$7.50
16.671
$ 75.017
$ 14.50
$8.00
20.492
$ 92.213
$ 14.50
$8.50
20.000
$ 89.998
$ 14.50
$9.00
19.760
$ 88.920
$ 14.50
$9.50
17.123
$ 77.053
$ 14.50
$10.00
12.644
$ 56.896
$ 14.50
$10.50
12.785
$ 57.531
$ 14.50
$11.00
12.216
$ 54.974
$ 14.50
$11.50
13.246
$ 59.608
$ 14.50
$12.00
8.637
$ 38.867
$ 14.50
$12.50
10.595
$ 47.678
$ 14.50
$13.00
5.857
$ 26.357
$ 14.50
$13.50
2.615
$ 11.768
$ 14.50
$14.00
2.739
$ 12.326
$ 14.50
$14.50
5.291
$ 23.809
$ 14.50
$15.00
3.051
$ 13.730
$ 14.50
Explanation / Answer
Answer:
Answer:
To get profit maximizing price lets calculate profit at each level.
Profit = TR - TC
and TR = Price * number of subscriber
TC = Cost of license fee + general administrative and divisional cost
Price
No of subscribers
Cost of license fees
Divisoanl, general and adm costs
TR
TC
Profit
5
29.974
134.883
14.5
149.87
149.383
0.487
5.5
29.256
131.651
14.5
160.908
146.151
14.757
6
17.822
80.199
14.5
106.932
94.699
12.233
6.5
22.657
101.956
14.5
147.2705
116.456
30.8145
7
19.897
89.537
14.5
139.279
104.037
35.242
7.5
16.671
75.017
14.5
125.0325
89.517
35.5155
8
20.492
92.213
14.5
163.936
106.713
57.223
8.5
20
89.998
14.5
170
104.498
65.502
9
19.76
88.92
14.5
177.84
103.42
74.42
9.5
17.123
77.053
14.5
162.6685
91.553
71.1155
10
12.643
56.896
14.5
126.43
71.396
55.034
10.5
12.785
57.532
14.5
134.2425
72.032
62.2105
11
12.216
54.974
14.5
134.376
69.474
64.902
11.5
13.246
59.608
14.5
152.329
74.108
78.221
12
8.637
38.867
14.5
103.644
53.367
50.277
12.5
10.595
47.78
14.5
132.4375
62.28
70.1575
13
5.857
26.357
14.5
76.141
40.857
35.284
13.5
2.615
11.768
14.5
35.3025
26.268
9.0345
14
2.739
12.326
14.5
38.346
26.826
11.52
14.5
5.291
23.809
14.5
76.7195
38.309
38.4105
15
3.051
13.73
14.5
45.765
28.23
17.535
As you can see profit is maximized at Price of $11.5
Recommended price is $11.5. By adjusting price to this level, the profit will be $78221. And total revenue will be $152329.
Yes the revenue will increase as well.
Price
No of subscribers
Cost of license fees
Divisoanl, general and adm costs
TR
TC
Profit
5
29.974
134.883
14.5
149.87
149.383
0.487
5.5
29.256
131.651
14.5
160.908
146.151
14.757
6
17.822
80.199
14.5
106.932
94.699
12.233
6.5
22.657
101.956
14.5
147.2705
116.456
30.8145
7
19.897
89.537
14.5
139.279
104.037
35.242
7.5
16.671
75.017
14.5
125.0325
89.517
35.5155
8
20.492
92.213
14.5
163.936
106.713
57.223
8.5
20
89.998
14.5
170
104.498
65.502
9
19.76
88.92
14.5
177.84
103.42
74.42
9.5
17.123
77.053
14.5
162.6685
91.553
71.1155
10
12.643
56.896
14.5
126.43
71.396
55.034
10.5
12.785
57.532
14.5
134.2425
72.032
62.2105
11
12.216
54.974
14.5
134.376
69.474
64.902
11.5
13.246
59.608
14.5
152.329
74.108
78.221
12
8.637
38.867
14.5
103.644
53.367
50.277
12.5
10.595
47.78
14.5
132.4375
62.28
70.1575
13
5.857
26.357
14.5
76.141
40.857
35.284
13.5
2.615
11.768
14.5
35.3025
26.268
9.0345
14
2.739
12.326
14.5
38.346
26.826
11.52
14.5
5.291
23.809
14.5
76.7195
38.309
38.4105
15
3.051
13.73
14.5
45.765
28.23
17.535