Question

This problem contains three parts. In Part A, you are asked to determine the parameters of the profit function - the contribution margin and the fixed costs. You should not move on to Parts B and C until you get Part A correct, or until you use up all of your tries. The correct profit function parameters will be given to you after you have completed Part A - you should use these parameters in Parts B and C.

The problem is worth 20 points. Parts A and B are worth eight points each; Part C is worth four points. To get the eight points for Part A, you must answer both questions correctly; to get the eight points for Part B, you must answer all four questions correctly. You get eight tries on Part A, eight on Part B, and four on Part C.
______________________________________________________

ableVision has been approached by the City of Mirada to run its cable operations in 2020. 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 $30.49 per month.
• It will pay the city $1,300,000 per year plus $3.50 per cable subscriber per month to maintain the physical facilities.
• It will actually pay another company a monthly fixed fee of $50,000 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 $130,000 per month plus 7% of monthly subscriber revenue.

CableVision has several questions about its monthly revenues, costs, and profits in 2020.

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 (8 tries; 8 points)
1. What is the estimated monthy contribution margin per cable subscriber for CableVision in 2020?   

2. What are the estimated total monthly fixed costs for CableVision in 2020?   

Tries 0/8

Part B (8 tries; 8 points)
1. What is CableVision's estimated monthly operating income in 2020 if 20,000 residents subscribe?   

2. How many monthly subscribers would be required for CableVision to break even in 2020?   

3. How many monthly subscribers would be required for CableVision to earn $26,000 per month in 2020?   

4. Assuming a tax rate of 33%, how many monthly subscribers would be required for CableVision to earn $26,000 per month in 2020?   

Tries 0/8

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 $26,000 per month in 2020 (ignore taxes)?    

Answer 1

Answer with working notes is given below

Part A $30.49 Contribution margin per cable subscriber Revenue per cable subscriber Less: Variable cost Physical facilities Broadcasting cost Operating costs - 7% of $30.49 Total variable cost Contribution margin per cable subscriber $3.50 $8.50 $2.13 $14.13 $16.36 Monthly fixed cost Physical facilities Broadcasting cost Operating costs Total fixed cost $108,333($1,300,000/12) $50,000 $130,000 $288,333 Part B 1 Total residents Total Revenue Variable Cost Contribution Fixed Cost Operating Income 20,000 $609,800 $282,686 $327,114 $288,333 $38,7811 Per unit $30.49 $14.13 $16.36 2 Break even point - monthly subscribers Fixed Cost Contribution Margin per cable subscriber $288,333 $16.36 17,629 3 Total Fixed Cost per month Net Operating income Total Target needed $288,333 $26,000 $314,333 Contribution per cable subscriber $16.36 19,219 Monthly subscribers needed (Target needed/Contribution per unit) Net Operating income after tax Tax rate Income before tax $26,000 33% $38,806 ($26,000/(1-0.33) Total Fixed Cost per month Net Operating income before tax Total Target needed $288,333 $38,806 $327,139 Contribution per cable subscriber $16.36 20,002 Monthly subscribers needed (Target needed/Contribution per unit) Part C Total residents cable subscribers Contribution per resident Total Contribution Less: Net operating income Fixed Operating Cost 21,000 A $16.36 B $343,470 A*B $26,000 $317,470