Question

ANZflix, a media-services provider, charges subscribers $13.49 per month. To attract more customers, the
Management and Product Planning team spents an estimated cost at $52,000 to produce and deploy products
across all user interfaces. Also, the Software Engineering team maintains all systems and infrastructure to ensure
that members can continue to sign up and watch ANZflix. This maintainance costs ANZflix $56,000 per month.
ANZflix uses a server in Taiwan to deliver streaming videos to its subscribers and the facility runs at a cost of
$135 per month. Another cost incurred by ANZflix includes $0.02 per GB (GigaByte) of bandwidth to deliver
content. In addition, the external studios making the content are paid $0.15 every time for a subscriber watches
one program. A typical ANZflix subscriber will watch 30 programs, streaming 65GB of film and TV shows per
month. Each subscriber will also cost ANZflix $1.14 per month to maintain their membership.
(a) Using the above information, calculate:
(i) The break-even number of subscribers per month for ANZflix.
(ii) The monthly revenue at break-even.
Show all working out including the modelling and solution steps.
(b) Provide an EXCEL graph detailing the necessary information to show the break-even points contained in your
responses to parts (a) of this question. The graph must illustrate the B.E.P. and the region corresponding to profits
and the region corresponding to losses. Your student ID must be included as a part of the title of the graph.
(c) How many subscribers are required to obtain a profit of $120,000 per month? What is the monthly revenue
for this number of subscribers? Show all working out including the modelling and solution steps.
(d) The marketing department is forecasting that if the subscription price is reduced by 10%, Anzflix will attract
35% more subscribers than the current number when monthly profit is $100,000. However, as they don’t have a
degree in analysing data they need you to make sure they aren’t making bad recommendations. Calculate the new
break-even number of subscribers, the new revenue and thus the new profit for these changes. Show all working
out including the modelling and solution steps.
(e) What effect does the change in part (d) have on the contribution margin? Explain the effect of this change on
the expected break-even number in part (a). Support your justification with calculation of both contribution
margins.

Answer 1

a]

i]

break-even number of subscribers per month = monthly fixed cost / contribution per subscriber per month

Managment/Product planning cost is a one-time marketing product development cost, and not a recurring fixed cost. Hence, it is not included in fixed costs

monthly fixed cost = (Software Engineering costs + Server cost)

monthly fixed cost =  $56,000 + $135 = $56,135

Contribution per subscriber per month = Revenue per subscriber per month - variable cost per subscriber per month

variable cost per subscriber per month = bandwidth cost + royalty cost + maintenance cost

bandwidth cost = number of GB * cost per GB = 65 * $0.02 = $1.30

royalty cost = number of programs * cost per program = 30 * $0.15 = $4.50

variable cost per subscriber per month =  $1.30 + $4.50 + $1.14 = $6.94

Contribution per subscriber per month = $13.49 - $6.94 = $6.55

break-even number of subscribers per month = $56,135 / $6.55 = 8570 subscribers

ii]

monthly revenue at break-even = subscribers * revenue = 8570 * $13.49 = $115,609

b]

The portion of the line chart which is below the X-axis represents losses

The portion of the line chart which is above the X-axis represents profits

The point where the line chart intersects the X-axis is the BEP

c]

Subscribers required = (Desired profit + monthly fixed cost) / Contribution per subscriber per month

Subscribers required = ($120,000 + $56,135) / $6.55 = 26,891 subscribers