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# Cost Volume Profit Analysis: Netflix

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Using the 10-k filing for Netflix,

Break-even is the point where fixed costs equal the total contribution margin. Another way of saying the same thing is that break-even is the point where net income equals zero. The task for this fourth SLP is to further assess Netflix's financial position.

Assume that 70% of the company's operating expenses are fixed.

What is the trend in the contribution margin ratio over the last three years?
What is the trend in the break-even point for operations, measured in sales dollars, over the last three years?
What is the trend in the margin of safety?
How would the results change if the proportion of operating expenses that are fixed increases to 80%? If the proportion of operating expenses that are fixed falls to 60%?
Assuming that the total dollar amount of fixed costs remains the same as in your computations for the first bullet point above, how would operating income change if sales decline by 10%? How would operating income change if sales increase by 10%?
Prepare a memo to the CEO interpreting the results of the analyses, including a CVP chart for the most recent year. Discuss your key assumptions and the importance of those assumptions for the analysis.

#### Solution Preview

Cost Volume Profit Analysis Using the 10-k filing for Netflix.

Prepare a memo to the CEO interpreting the results of the analyses, including a CVP chart for the most recent year. Discuss your key assumptions and the importance of those assumptions for the analysis.

Dear CEO,

As you see from the two page exhibit in Excel (attached), the contribution margin for Netflix is getting worse, at 70.4% in 2012, down from 73.9% in 2010 and 73.5% in 2011. The margin of safety, the distance between current levels and breakeven, is at ...

#### Solution Summary

Your tutorial is a discussion of 356 words plus a two page exhibit in Excel of 363 words. A CVP chart is provided.

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## Analyzing Pricing Decisions for Netflix and Blockbuster

Analyzing Pricing Decisions for Netflix and Blockbuster
Netflix and its competitors have faced interesting decisions regarding product offerings and pricing. As Netflix pursued offering online movie downloads in 2005, its primary competitor, Blockbuster, revised its product offering in response. In addition, both companies have examined the appropriate pricing schema to remain competitive with their respective product offerings.
Using the spreadsheet handout Netflix and Blockbuster Financial Data, answer the following:

ââ?¬¢ Develop simple cost-volume-profit models for Netflix and Blockbuster.
ââ?¬¢ What is the unit volume break-even level of Netflix?
ââ?¬¢ What is the break-even revenue level of Blockbuster?
ââ?¬¢ How can Netflix and Blockbuster achieve profits equal to 10% of revenues?
ââ?¬¢ How can Blockbuster improve profitability given the CVP model?
ââ?¬¢ What conditions would allow Netflix to increase price, and how would that affect profits?

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