CableVision has been approached by the City of Mirada to run its cable operation
ID: 2420009 • 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 $29.99 per month.
CableVision will pay the city $100,000 per month plus $3.50 per cable subscriber per month to maintain the physical facilities.
CableVision will actually pay another company an annual fixed fee of $820,000 plus $7.75 per cable subscriber per month to broadcast the 25 channels.
CableVision estimates that operating costs for billing, program news mailings, etc. will be $125,000 per month plus 9% of monthly revenue. CableVision has several questions about its monthly revenues, costs, and profits in 2016.
Part A (6 tries; 8 points)
1. What is the estimated monthly contribution margin per cable subscriber for CableVision in 2016? 16.0400
2. What are the estimated total monthly fixed costs for CableVision in 2016? 293333
Part B (8 tries; 8 points)
1. What is CableVision's estimated monthly operating income in 2016 if 18,000 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 $30,000 per month in 2016?
4. Assuming a tax rate of 31%, what must revenue be in order for CableVision to earn $30,000 per month in 2016?
Part C (4 tries; 4 points)
Some of CableVision's managers are uncertain about their estimate of monthly fixed operating costs. Assuming that 19,000 residents subscribe, how large can monthly fixed operating costs be for CableVision to still earn $30,000 per month in 2016 (ignore taxes)?
How do you do Part B #4 and Part C
#3 IS CORRECTExplanation / Answer
Part A 1) Contribution Margin - 2016 Sales Revenue per unit Less : Variable cost per unit 29.99 Maintenance cost 3.50 broadcasting fee 7.75 operating cost 9% of 29.99 2.70 13.95 Contribution per unit 16.04 2) Fixed monthly cost Fee for maintenance of facility 100000.0 Fee for broadcast ( 820000/12) 68333.3 Operating fee 125000.0 Total fixed cost 293333.3 Part B 1) Number of subscribers 18000 Contribution per unit 16.04 Total contribution 288720.00 Less: Fixed cost 293333.33 operating loss -4613.33 2) BEP ( in units) = Fixed cost / Contribution perunit = 293333 / 16.04 18287.59 = 18288 ( rounded off) subscribers 3) Profit required ( per month) = 30000 Contribution per unit = 16.04 Fixed cost = 293333 Hence number of units required = ( Fixed cost + profit) / contribution per unit = ( 293333 + 30000)/ 16.04 = 323333/16.04 = 20158 ( rounded off) units 4) If Tax rate 31% then, profit required ( post tax ) = 30000 pre tax profit = 30000 *100/69 ( 100-31) = 43478 Hence number of units required = ( Fixed cost + profit) / contribution per unit = ( 293333 + 43478)/ 16.04 = 336811/16.04 = 20998 units Total revenue required ( 20998 * 29.99) 629730 Variable cost ( 20998 * 13.95) 292922 Contribution 336808 Less Fixed expenses 293333 Operating income 43475 Tax @ 31% 13477 Net income 29997 Net income ( rounded) 30000 Part C Contribution per unit 16.04 profit required 30000 Fixed cost 168333 + x ( 100000 + 68333 + x) Number of unit 19000 Total contribution ( 19000 *16.04) 304760 Now, Total contribution - fixed cost = 30000 304760 - ( 168333 + x) = 30000 304760 - 168333 - x = 30000 136427 -x = 30000 x = 136427 - 30000 = 106427 Hence operating fixed xost should not exceed 106427 to earn an ncome of $ 30000 pm