CableVision has been approached by the City of Mirada to run its cable operation
ID: 2421965 • 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 $31.99 per month.
CableVision will pay the city $1,300,000 per year plus $3.00 per cable subscriber per month to maintain the physical facilities.
CableVision will actually pay another company a monthly fixed fee of $65,000 plus $8.75 per cable subscriber per month to broadcast the 25 channels.
CableVision estimates that operating costs for billing, program news mailings, etc. will be $130,000 per month plus 9% 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 (6 tries; 8 points)
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 (8 tries; 8 points)
1. What is CableVision's estimated monthly operating income in 2016 if 20,000 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 $25,000 per month in 2016?
4. Assuming a tax rate of 31%, what must revenue be in order for CableVision to earn $25,000 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 21,000 residents subscribe, how large can monthly fixed operating costs be for CableVision to still earn $25,000 per month in 2016 (ignore taxes)?
Explanation / Answer
PART A
1./
SALES REVENUE PER CABLE SUBSCRIBER = $31.99
LESS VARIABLE COST TO THE CITY = ($3.00)
LESS VARIABLE COST TO ANOTHER COMPANY = ($8.75)
LESS VARIABLE OPERATING COST ($31.99 * 9%) = ($2.88)
CONTRIBUTION MARGIN = $17.36
2./
FIXED COST PAID TO CITY =$108333
FIXED COST TO ANOTHER COMAPNY = $65000
OPERATING FIXED COST = $130000
TOTAL MONTHLY FIXED COST = $303333
PART B
1./
2./
BREAK EVEN POINT = TOTAL MONTHLY FIXED COST / CONTRIBUTION MARGIN PER SUBSCRIBER
= $303333 / $17.36
= 17473 SUBSCRIBER
3./
NO. OF SUBSCRIBERS = (MONTHLY FIXED COST + $25000) / CONTRIBUTION MARGIN
NO. OF SUBSCRIBERS = ($303333 + $25000) / $17.36
= 18913 SUBSCRIBERS
4./
REVENUE TO BE EARNNED
= (MONTHLY FIXED COST + TARGETED BEFORE TAX INCOME) / CONTRIBUTION MARGIN RATIO
CONTRIBUTION MARGIN RATIO = CONTRIBUTION MARGIN / SALES REVENUE
= $17.36 / $31.9
= 0.54
TARGETED BEFORE TAX INCOME = $25000 / 69%
= $36232
REVENUE TO BE EARNNED = ($303333 + $36232) / 0.54
= $628824
PART C
FIXED COST = (NO. OF SUBSCRIBERS * CONTRIBUTION MARGIN PER SUBSCRIBER) - TARGET INCOME
= (21000 * $17.36) - $25000
= $339560
CONTRIBUTION MARGIN (20000 * $17.36) $347200 LESS FIXED COST PER MONTH ($303333) OPERATING INCOME $43867