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.  

How much do profits change if the price is changed to the proposed one?

How much do revenues change if the price is changed to the proposed one?

show how all variables are calculated (price, profit, and revenue)

Answer 1

In this instance, the total cost of operation of EPIX includes both the fixed cost such as licensing cost and the variable cost or expense like the other regional expenses. Considering that the market for cable and entertainment services is fairly competitive, EPIX pricing department could choose the price of its services which is equal to the marginal cost of operation or providing its services which is the cost or expense of providing additional unit of the entertainment service by the company or EPIX. This would theoretically maximize the overall or total profit level of the company under an assumably competitive market setting. Alternatively, considering that EPIX has a considerable market or price-determining power, it can set its service price equal or identical to the marginal revenue obtained from selling each additional unit of service to its subscribers or consumers or the additional revenue obtained from selling one additional unit of its service. This would maximize its profit under market power or a fairly monopolistic market setting. Altering the service price in accordance with the profit-maximizing motivation or incentive would change the overall or total revenue of the company or EPIX as well as price and revenue are congruently determined, holding the number of sales or subscriptions as constant.

Considering that the price currently charged by EPIX is different or below its profit-maximizing level, reaching the profit-maximizing price would expectedly increase the total profit of the company, holding the total cost of the company constant or unchanged. In this context, holding the number of subscriptions or overall sales constant, the total revenue of the company which is calculated as the service price multiplied by the overall quantity of service or the total number of service subscriptions would increase proportionately or identically as the increase or change in the service price consequently implying that the total profit of the company which is mathematically as the total revenue of the company less the total cost of the company, would also increase proportionately or identically.