Question

Break-even subscribers for a video service

Star Stream is a subscription-based video streaming service. Subscribers pay $120 per year for the service. Star Stream licenses and develops content for its subscribers. In addition, Star Stream leases servers to hold this content. These costs are not variable to the number of subscribers, but must be incurred regardless of the subscriber base. In addition, Star Stream compensates telecommunication companies for bandwidth so that Star Stream customers receive fast streaming services. These costs are variable to the number of subscribers. These and other costs are as follows: Enter your answers in whole dollars.

Server lease costs per year		$ 100,000,000
Content costs per year		2,000,000,000
Fixed operating costs per year		900,000,000
Bandwidth costs per subscriber per year		15
Variable operating costs per subscriber per year		25

a. Determine the break-even number of subscribers.
subscribers

b. Assume Star Stream planned to increase available programming and thus increase the annual content costs to $2,600,000,000. What impact would this change have on the break-even number of subscribers?
Break-even number of subscribers will increase to  subscribers.

c. Assume the same content cost scenario in (b). How much would the annual subscription need to change in order to maintain the same break-even as in (a)?
The annual subscription need to increase from $ to $in order to maintain the same break-even as in (a).

Answer 1

Star Stream

1. Determination of the break-even number of subscribers:

Break-even number of subscribers = total fixed cost/contribution margin per subscriber

Contribution margin per subscriber –

Price per subscriber = $120 per year

Variable costs –

Bandwidth cost per subscriber per = $15 per year

Operating cost per subscriber per year = $25 per year

Total variable costs = $40

Contribution margin per subscriber per year = $120 - $40= $80

Fixed costs –

Server lease costs per year = $100,000,000

Content costs per year = $2,000,000,000

Operating costs per year = $900,000,000

Total fixed costs = $3,000,000,000

Number of subscribers to break-even = $3,000,000,000/$80 = 37,500,000

1. Impact of increase in annual content costs to $2,600,000,000 on break-even number of subscribers:

Fixed costs –

Server lease costs per year = $100,000,000

Content costs per year = $2,600,000,000

Operating costs per year = $900,000,000

Total fixed costs = $3,600,000,000

Number of subscribers to break-even = $3,000,000,000/$80 = 45,000,000

Break-even number of subscribers would increase to 45,000,000 with increase in annual content costs.

1. Determination of annual subscription so as to maintain the same break-even of 37,500,000 subscribers:

At break-even point, total revenues = total costs

Total revenues = total variable costs + total fixed costs

Assuming 37,500,000 subscribers, and annual subscription to be S,

37,500,000 S = $40 x (37,500,000) + $3,600,000,000

37,500,000S = $5,100,000,000

S = 5,100,000,000/37,500,000 = $136

The revised annual subscription per subscriber = $136

The annual subscription need to increase from 120 to $136 in order to maintain the same break-even as in (a).