MooviePass has a simple business model: Charge customers a fixed annual subscription fee of $100, and pay for them to go to as many movies as they want. With such a simple model, and no need for any capital-intensive production, fixed costs are low: $50,000/year.

Movie tickets typically cost customers $14. However, given its large volume of purchases, MooviePass has worked out a deal with the theatres and is able to purchase tickets at a 50% discount, only paying $7 each time a subscriber goes to the movies (MooviePasss only variable cost).

MooviePass rolled out in a small metro area with only 50,000 potential customers. After doing some market research, MooviePass discovered there are three types of people:

• People who go to the movies 25 times per year (20% of the target population)
• People who go to the movies 12 times per year (60% of the target population)
• People who go to the movies 6 times per year (20% of the target population)

Given their market research, they expected to make a profit of $260,000 per year. They were surprised to find out that they ended up making a much lower profit: actually, a loss of $320,000.

MooviePass execs are currently trying to understand what went wrong in their business model. They know that partly, they overestimated sales volume. They had assumed that all 50,000 potential customers would want to buy their productinstead, they sold only 40,000 subscriptions. However, even at 80% of the expected sales volume, they were still forecasting a profit of close to $200,000.

The bigger culprit seems to be runaway costs---variable costs per subscriber are way higher than anticipated. Given their market analysis, they expected an average variable cost of $93.80 per subscriber. It ended up being $106.75---giving them a negative contribution margin!

The executives at MooviePass need your help to sort out these issues and start making profits if possible.

Q. Using concepts from CVP analysis, can you explain what MooviePass got wrong and how they ended up with a loss of $320,000? Provide clear, quantitative justifications.

(HINT: why did only 80% of target customers end up buying a subscription?)

Q. Based on your answer to the previous question, suppose MooviePass was able to negotiate an even lower rate with the movie theatres. At what ticket price would MooviePass break even? (Assume nothing else changes.)

Ignore the situation in the previous question---suppose the ticket prices cannot be negotiated any further.

Based on your answer to the first question, suppose MooviePass changed its subscription fee.

Q. What annual subscription fee would maximize MooviePasss profits? How much would MoviePass make? Again, provide clear, quantitative justifications.