The City of Mirada wants to offer cable television to its residents in 2009. The city has approached a company called CableVision to run its cable operations. After negotiating with key parties, CableVision has made the following agreements:
Mirada will offer its residents a basic set of 25 cable television stations at a rate of $30.49 per month (all of the revenue will go to CableVision).
The City of Mirada will maintain the physical facilities, and CableVision will pay the city $90,000 per month plus $3.25 per cable subscriber per month.
CableVision will actually pay another company to broadcast the 25 channels and will pay this company an annual fixed fee of $730,000 plus a monthly amount of $8.50 per cable subscriber per month.
CableVision will incur additional operating costs for billing, program news mailings, etc. These costs will include a fixed component of $120,000 per month, and a variable component of 7.5% of monthly revenue.
QUESTION:
CableVision is considering offering a premium package of 35 channels for $43.99 per month. If they do, all variable and fixed cost parameter values will remain the same. CableVision estimates that 20% of its subscribers will purchase the premium package. If CableVision offers the premium package, what is the estimated average monthly contribution margin per subscriber?