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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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