Question

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 $32.99 per month. • It will pay the city $85,000 per month plus $3.00 of the monthly cable subscriber rate per month to maintain the physical facilities. • It will actually pay another company an annual fixed fee of $730,000 plus $9.00 per cable subscriber per month to broadcast the 25 channels. CableVision estimates that operating costs for billing, program news mailings, etc. will be $110,000 per month plus 8% of the monthly subscriber rate 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.]

Answer 1

1.Monthy contribution margin per subscriber = Revenue per subscriber – variable costs per subscriber

= 32.99-3-9-8%*32.99

= $18.3508

i.e. $18.35

2.Estimated monthly fixed costs = 85,000+730,000/12 + 110,000

= $255,833

1.Operating income = Contribution margin – fixed costs

= 20000*18.35 – 255,833

= $111,167

i.e. $111,167

2.Break even subscribers = Fixed costs/Contribution margin per subscriber

= 255,833/18.35

= 13,942 subscribers

i.e. 13,942 subscribers

3.Required = (25000+255,833)/18.35

= 15,032 subscribers

4.Required = (25000/0.68 + 255,833)/18.35

= 15,945 subscribers

1.Contribution Margin earned = 18.35*22000 = $403,700

Required profit = 25000

Other fixed costs = 85000 + 730,000/12 = $145,833

Maximum monthly operating fixed costs = $403,700-25000-145833

= $232,867