CableVision has been approached by the City of Mirada to run its cable operation
ID: 2418931 • Letter: C
Question
CableVision has been approached by the City of Mirada to run its cable operations in 2016. After negotiating with key parties, CableVision has made the following agreements:
It will offer Mirada residents a basic set of 25 cable television stations at a rate of $33.49 per month.
CableVision will pay the city $115,000 per month plus $3.00 per cable subscriber per month to maintain the physical facilities.
CableVision will actually pay another company an annual fixed fee of $820,000 plus $8.00 per cable subscriber per month to broadcast the 25 channels.
CableVision estimates that operating costs for billing, program news mailings, etc. will be $115,000 per month plus 9% of monthly revenue.
CableVision has several questions about its monthly revenues, costs, and profits in 2016.
Part A
1. What is the estimated monthly contribution margin per cable subscriber for CableVision in 2016?
2. What are the estimated total monthly fixed costs for CableVision in 2016?
Part B
1. What is CableVision's estimated monthly operating income in 2016 if 17,000 residents subscribe?
2. How many monthly subscribers would be required for CableVision to break even in 2016?
3. How many monthly subscribers would be required for CableVision to earn $28,000 per month in 2016?
4. Assuming a tax rate of 34%, what must revenue be in order for CableVision to earn $28,000 per month in 2016?
Part C
Some of CableVision's managers are uncertain about their estimate of monthly fixed operating costs. Assuming that 20,000 residents subscribe, how large can monthly fixed operating costs be for CableVision to still earn $28,000 per month in 2016 (ignore taxes)?
Explanation / Answer
Cable Vision City of Mirada
SP SR
Basic Set of Televison Cable 25
Rate Per Month 33.49
Total revenue P.a 837.25
Total monthly Cost 115000 Fixed
3 Variable
115003
820000 Fixed
8 Variable
820008
Operating Cost 115000 Fixed
3.0141 Variable
115003
Solution:
PART A:
Variable Cost per Station 14.0141
Estimated Monthly Contribution 19.4759
Monthly Fixed Cost 1050000
PART B:
Total Monthly income if 17000 Subscibes
Revenue 569330
Less: Variable Cost 238239.7
Contribution 331090.3
Monthly Fixed Cost 1050000
Net income -718910
Break even 53912.78
Monthly subscribers would be required for CableVision to earn $28,000 per month in 2016 55350.46
If Tax is 34% 56091.08 Required PBT 42424.24
PART C:
Total Monthly income if 20000 Subscibes
Revenue 669800
Less: Variable Cost 280282
Contribution 389518
Required Profit 28000
Total Fixed Cost (Estimated) 417518