Question

TunnelClock has been approached by the City of London to run its cable operations in 2020. After negotiating with key parties, TunnelClock has made the following agreements:

• It will offer London residents a basic set of 25 cable television stations at a rate of $29.99 per month.
• It will pay the city $105,000 per month plus $3.50 of the monthly cable subscriber rate per month to maintain the physical facilities.
• It will actually pay another company an annual fixed fee of $820,000 plus $8.50 per cable subscriber per month to broadcast the 25 channels.

TunnelClock estimates that operating costs for billing, program news mailings, etc. will be $120,000 per month plus 8% of the monthly subscriber rate.

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

[ROUND YOUR ANSWER TO PART A, QUESTION 1 TO THE NEAREST CENT; ROUND ALL OTHER ANSWERS TO THE NEAREST UNIT OR NEAREST DOLLAR.]

1. What is the estimated monthy contribution margin per cable subscriber for TunnelClock in 2020?

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

1. What is TunnelClock's estimated monthly operating income in 2020 if 17,000 residents subscribe?    

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

3. How many monthly subscribers would be required for TunnelClock to earn $22,000 per month in 2020?    

4. Assuming a tax rate of 30%, how many monthly subscribers would be required for TunnelClock to earn $22,000 per month in 2020?  

5. Some of TunnelClock'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 TunnelClock to still earn $22,000 per month in 2020 (ignore taxes)?

Answer 1

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

= 29.99-3.50-8.50-8%*29.99

= $15.5908

i.e. $15.59

2.Estimated monthly fixed costs = 105,000+820,000/12 + 120,000

= $293,333.33

i.e. $293,333

1.Operating income = Contribution margin – fixed costs

= 17000*15.59 – 293,333

= -$28,303

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

= 293,333/15.59

= 18,815.45 subscribers

i.e. 18,815 subscribers

3.Required = (22000+293,333)/15.59

= 32,927 subscribers

4.Required = (22000/0.7 + 293,333)/15.59

= 20,831 subscribers

1.Contribution Margin earned = 15.59*21000 = $327,390

Required profit = 22,000

Other fixed costs = 105000 + 820,000/12 = $173,333

Maximum monthly operating fixed costs = $327,390-22000-173333

= $132,057