CableVision has been approached by the City of Mirada to run its cable operation
ID: 2421146 • 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 $30.99 per month.
CableVision will pay the city $85,000 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 $7.50 per cable subscriber per month to broadcast the 25 channels.
CableVision estimates that operating costs for billing, program news mailings, etc. will be $120,000 per month plus 7% of monthly revenue.
CableVision has several questions about its monthly revenues, costs, and profits in 2016.
REQUIRED [ROUND YOUR ANSWER TO PART A, QUESTION 1 TO THE NEAREST CENT; ROUND ALL OTHER ANSWERS TO THE NEAREST UNIT OR NEAREST DOLLAR.]
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 16,000 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 $27,000 per month in 2016?
4. Assuming a tax rate of 33%, what must revenue be in order for CableVision to earn $27,000 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 $27,000 per month in 2016 (ignore taxes)?
Explanation / Answer
Part A. Answer 1. Estimated Monthly Contribution Margin per Connection Revenue per Connection $30.99 Less: Variable Expenses Charges paid to City of Mirada $3 Charges paid to Another Company $7.50 Operating Expenses (7% of $30.99) 2.17 Total Varible expenses $13 Contribution Margin per Connection $18.32 Answer 2. Estimated Total Monthly Fixed Costs Fixed Cost paid to City of Mirade $85,000 Fixed Charges paid to Another Company 68,333 Operating Fixed Expenses for billings, program news mailings, etc $120,000 Total Fixed Expenses per month $273,333 Part B. Answer 1. Estimated Monthly Operating Income Particulars Amount Revenue -16000 Connection X 30.99 495,840 Less: Variable Expenses Charges paid to City of Mirada 48,000 Charges paid to Another Company 120,000 Operating Expenses (7% of $30.99) 34,709 Total Varible expenses 202,709 Contribution Margin per Connection 293,131 Less: Fixed Expenses per month Fixed Cost paid to City of Mirade 85,000 Fixed Charges paid to Another Company 68,333 Operating Fixed Expenses for billings, program news mailings, etc 120,000 Total Fixed Expenses per month 273,333 Operating profit 19,798 Answer 2. Break Even point = Fixed Cost / Contribution per unit Break Even point (In Connections) = 273333 / 18.32 = 14919.37 or 14920 nos Answer 3. Units to attain Targeted profit = (Fixed Cost + Targeted Profit) / Contribution per unit Units to attain Targeted profit = (273333 + 27000)/18.32 = 16393.11 nos or 16394 nos Answer 4. Units to attain Targeted profit = (Fixed Cost + Targeted Profit) / Contribution per unit Targeted Profit = 27000 / (1 - 33%) = $40299 Units to attain Targeted profit = (273333 + 40299) / 18.32 = 17118.99 nos or 17119 nos Part C. Profit to be earned = $27000 Contribution Margin Ratio = 59.12% No Of Connections = 20000 nos Total Contribution - $18.32 X 20000 nos 366,414 Less: Fixed Expenes Fixed Cost paid to City of Mirade 85,000 Fixed Charges paid to Another Company 68,333 Less: Opearting Profit - expected 27,000 Fixed Operating Expenses 186,081