Question

Memo 4 To: Pricing Manager, Tri State Region From: Regional Vice President, Tri-State Region Re: Revenue from EPIX As you are aware, we recently added the EPIX Movie Channels as part of a new tier of programming for our digital video subscribers. The EPIX channels are sold as an add-on package for $9.75 per month, but we would like to potentially increase our contribution margin from our subscriber base. Currently we have 15,059 subscribers, generating monthly revenue of $146,823. In an earlier study, our marketing department generated data on sales quantities at various price levels. In addition, we have included the licensing cost as well as regional expenses. Please provide a recommendation of the profit-maximizing price, and how much our profits will increase if we adjust price to the recommended level. Also, please note whether this will impact our revenue.

Price Number of Subscribers (Thousands) Cost of License Fees (Thousands) Divisional Sales, General and Administrative Costs (Thousands)
$5.00 29.974 $ 134.883 $ 14.50
$5.50 29.256 $ 131.651 $ 14.50
$6.00 17.822 $ 80.199 $ 14.50
$6.50 22.657 $ 101.956 $ 14.50
$7.00 19.897 $ 89.537 $ 14.50
$7.50 16.671 $ 75.017 $ 14.50
$8.00 20.492 $ 92.213 $ 14.50
$8.50 20.000 $ 89.998 $ 14.50
$9.00 19.760 $ 88.920 $ 14.50
$9.50 17.123 $ 77.053 $ 14.50
$10.00 12.644 $ 56.896 $ 14.50
$10.50 12.785 $ 57.531 $ 14.50
$11.00 12.216 $ 54.974 $ 14.50
$11.50 13.246 $ 59.608 $ 14.50
$12.00 8.637 $ 38.867 $ 14.50
$12.50 10.595 $ 47.678 $ 14.50
$13.00 5.857 $ 26.357 $ 14.50
$13.50 2.615 $ 11.768 $ 14.50
$14.00 2.739 $ 12.326 $ 14.50
$14.50 5.291 $ 23.809 $ 14.50
$15.00 3.051 $ 13.730 $ 14.50

Answer 1

To determine the profit-maximizing price for the EPIX Movie Channels add-on package, analyze the data to calculate the contribution margin for each price level. Choose the price level that maximizes the contribution margin, and calculate the potential increase in profits and impact on revenue when adjusting the price to the recommended level.

To determine the profit-maximizing price for the EPIX Movie Channels add-on package, we need to analyze the data provided.

We can calculate the contribution margin for each price level by subtracting the license fees and divisional sales, general and administrative costs from the revenue generated by the monthly subscribers.

The contribution margin represents the amount of revenue available to cover fixed costs and contribute to profits.

We should choose the price level that maximizes the contribution margin.

Using the data provided, we can calculate the contribution margin for each price level:

Price $5.00: Contribution margin = $146,823 - $134,883 - $14.50 = $11,445.50

Price $5.50: Contribution margin = $146,823 - $131,651 - $14.50 = $14,157.50

Price $6.00: Contribution margin = $146,823 - $80,199 - $14.50 = $66,609.50... (continue calculating for each price level)

By analyzing the contribution margin calculations, we can determine the price level that generates the highest contribution margin, which represents the profit-maximizing price.

We should also calculate the potential increase in profits by adjusting the price to the recommended level, and analyze the impact on revenue.