CableVision has been approached by the City of Mirada to run its cable operation

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 $1,200,000 per year plus $2.50 per cable subscriber per month to maintain the physical facilities.

- CableVision will actually pay another company a monthly fixed fee of $65,000 plus $8.50 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 8% 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 19,000 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 35%, what must revenue be in order for CableVision to earn $28,000 per month in 2016? ( )

Part C.

1. Some of CableVision's managers are uncertain about their estimate of monthly fixed operating costs. Assuming that 21,000 residents subscribe, how large can monthly fixed operating costs be for CableVision to still earn $28,000 per month in 2016 (ignore taxes)? ( )

Please show your work thanks!

Explanation / Answer

Variable cost per cable subcriber =$2.5+$8.5+8%*$33.49=$13.6792

Part A:

1.Contribution margiin=$33.49-$13.6792=$19.8108

2.fixed cost=$1,200,000/12+$65,000+$115,200=$280,200

Part B:

1.Operating income=19,000*$19.8108-$280,200=$96,205

2.Breakeven in subcribers=$280,200/$19.8108=14,144

3.no of subcribers required to get $28,000 profit=($280,400+$28,000)/$19.8108=15,557

4.

operating profit=$28,000

operating profit before tax=$28,000/.65=$43,076.92

Total revenue to get=($280,400+$43076.92)*33.49/$19.8108=$546,835.2

Part C:

Contribution=$19.81

operating fixed cost=contribution-fixed cost other than operating fixed cost -operating profit

=$21,000*19.81-$165,000-$28,000=$223,010

operating fixed cost can spend up to $223,010

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