ECO 204 Assignment: Netflix Breakeven & Contribution Analysis Report

This case study analyzes Netflix's cost structure, break-even points, and contribution analysis across its domestic streaming, international streaming, and DVD segments using data from Q1 2010 to Q4 2018. It determines cost functions for each segment through scatter plot analysis, identifies fixed costs via intercept terms, and calculates break-even member numbers by equating total revenue and total cost using Excel solver. The analysis extends to finding the break-even number for all three segments combined, highlighting the importance of domestic streaming and DVD segments due to their higher contribution margins. Furthermore, it includes an elementary contribution analysis, estimating the impact of price changes in the domestic streaming segment on Netflix's total profit using the mid-point elasticity method, revealing the sensitivity of total profit to price adjustments and member counts. Desklib provides access to this and many other solved assignments.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Course ID

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Table of Contents
Answer 1: Analysis of cost structure...............................................................................................2
Answer a......................................................................................................................................2
Answer b......................................................................................................................................4
Answer 2: Break even number of members....................................................................................5
Answer 3: Break even number for three segments together............................................................5
Answer 4: Elementary contribution analysis...................................................................................6
Bibliography....................................................................................................................................8
Appendix..........................................................................................................................................9

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Answer 1: Analysis of cost structure
Answer a
In order to compute the cost function for each segment, the data are first sorted following
the cost of each segment and number of members. For estimating total expense, COGS and
marketing expenses are added. Separate excel sheets are prepared for each of three segments –
domestic streaming segment, international streaming segment and DVD segment. Scatter
diagram has been constructed to analyze the relation between number of members and total
expense. The fitted trend line of the scatter diagram helps to understand the relation between
members and total expense and hence, the cost function. The cost function of the respective
segments are discussed below.
10,000 20,000 30,000 40,000 50,000 60,000 70,000
$-
$200,000.00
$400,000.00
$600,000.00
$800,000.00
$1,000,000.00
$1,200,000.00
$1,400,000.00
$1,600,000.00
f(x) = 218799.363484819 exp( 2.98108345473804E-05 x )
R² = 0.977425085105849
Total Expense Vs Members
Member
Expense
Figure 1: Scatter plot of total expense and members of domestic streaming segment
From the scatter plot it has been observed that exponential tend is fitted best to the data
series. The obtained equation indicating cost function for domestic streaming is given as

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Y =218799e3E-05 X
Y: Total expense
X: Members
- 20,000 40,000 60,000 80,000 100,000
$-
$500,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
$2,500,000.00
f(x) = 24.396084459616 x + 41071.023740989
R² = 0.996619189377907
Total Expense Vs Members
Members
Expense
Figure 2: Scatter plot of total expense and members of international streaming segment
The scatter plot between total expense and members of international segment shows a
positive linear relationship between the two. Linear trend therefore is best fitted for the data set.
The obtained cost equation for international streaming segment.
Y =41071+24.396 X
Y: Total expense
X: Members

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DVD segment
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
$-
$20,000.00
$40,000.00
$60,000.00
$80,000.00
$100,000.00
$120,000.00
$140,000.00
$160,000.00
$180,000.00
$200,000.00
f(x) = 2.81158608653074 x^1.19766276662317
R² = 0.989009905161166
Total Expense Vs Members
Members
Expense
Figure 3: Scatter plot of total expense and members of DVD segment
The scatter plot of total expense and number of members for DVD segment reveals a
positive relation between the two variables. The power trend has been set to fit the data.
Obtained cost function for this segment is given below
Y =2.8116 X1.1977
Y: Total expense
X: Members
Answer b
The intercept term of the cost function indicates fixed cost. This shows how much cost
the company needs to bear even with zero members. For the domestic streaming segment, the
intercept term is 218799. For international streaming segment, the intercept term is 41071.

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However, for DVD segment, there is no intercept terms. This implies cost for this segment is
zero when number of members is zero.
Answer 2: Break even number of members
The break-even number of members indicates number of members for which the
company earns a zero profit. This is to say that, for breakeven number of member total revenue
is just sufficient to recover total cost. For each of the segment, revenue and cost are computed
using break even number of members and then solver is used to find the optimal number of
members at the break-even point.
In order to compute break-even number of member, total revenue and total cost are
computed corresponding to break even number of members. In the excel solver, the value of
objective function or profit function is set at zero. The changing variable cell is number of
members. For domestic streaming, break even number of members is 11253. For international
streaming and DVD segment, the respective break even number of members are 24535 and 0.
Answer 3: Break even number for three segments together
In the above-described scenario, the objective is to determine the number of domestic
members that Netflix would require to breakeven as a whole, holding constant the number of Q4-
2018 members in the international and DVD segments, as well as the prices across all the three
sections. As indicated in the calculations above, it is estimated that Netflix would only require
3,143 members for its Domestic streaming segment to breakeven as a whole, taking into account
the contribution from the international and the DVD segment.
In particular, the solver function was applied to estimate the number of domestic
members that would be needed, in addition to the contribution profits derived from the

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international and the DVD segment, for Netflix to breakeven. 3,143 members would yield an
estimated revenue of $107,250, with total fixed costs of $218,799 and total variable costs of
$21,630. Whereas this number of domestic members would result in a contribution loss of
$133,179, this would be covered for by proceeds from the other two segments, ensuring that the
firm breakevens. Holding the prices and the current number of other two sections constant,
Netflix would recognize profits when the number of domestic members exceeds 3,143 members.
The analysis of break-even number indicate the point where total revenue and total costs
are equal. The break-even number of members for the three sectors combined together indicate
how many members Netflix would require to earn a revenue such that all of its cost are
recovered. From the estimated break even number, it can be said that the company requires 3143
members to reach to the break-even point. In order to earn profit above the break-even point, the
company should have members more than 3143. If number of members is less than 3143, then
the company will incur a loss. The company can achieve the break-even number of members by
maintaining break-even number in each of the three segment. The break-even number of
members for domestic streaming segment is 11253. The same for international streaming is
24535. The sum of break-even numbers in the two segments exceed that of the break-even
number of members for the three sector together. The contribution margin of Netflix from
Domestic DVD is the largest followed by Domestic streaming and International streaming.
Therefore, Netflix should focus on attracting more member in domestic streaming and domestic
DVD. Netflix can adjust members in the profitable segments to attain overall break-even.
Answer 4: Elementary contribution analysis
The Board of Directors willing to estimate impact of a certain percentage change in price
of one segment on Netflix’s total profit. The targeted segment for the analysis is Domestic

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streaming segment. One way to estimate the impact of price change on total profit of Netflix is to
computed the elasticity of demand. This indicates change in total profit by capturing the effect of
price change on number of members. The preferred method for estimating the elasticity of
demand is the mid-point elasticity method. The formula for computing elasticity is given below.
Elasticity= Q2−Q1
P2−P1
× (P¿¿ 1+ P2)/2
(Q1 +Q2 )/2 ¿
The estimated elasticity is obtained as -2.22. This implies for 1 percent change in price in the
concerned segment, number of members declines by 2.22 percent. As percentage decline in price
is proportionately smaller than that of a change in number of members, any percent increase in
price will result in a decline in total profit by lowering revenue. As number of members in one
segment decreases, there is thus a proposed decline in overall number of members reducing total
profit of company.

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Bibliography
Chen, X. (2017). Elasticity as Relative Slopes: A Graphical Approach to Linking the Concepts of
Elasticity and Slope. The American Economist, 62(2), 258-267.
Morano, P., & Tajani, F. (2017). The break-even analysis applied to urban renewal investments:
a model to evaluate the share of social housing financially sustainable for private
investors. Habitat International, 59, 10-20.
Park, W., Lee, K., Doo, S., & Yoon, S. S. (2016). Investments for new product development: A
break-even time analysis. Engineering Management Journal, 28(3), 158-167.
Shao, L., Schleicher, T., Behrisch, M., Schreck, T., Sipiran, I., & Keim, D. A. (2016). Guiding
the exploration of scatter plot data using motif-based interest measures. Journal of Visual
Languages & Computing, 36, 1-12.

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Appendix
Estimation of elasticity
Domestic
Streaming
Dec
2018
Members
58,48
6
Revenues
$1,996,092.0
0
COGS
$1,093,446.0
0
Marketing
$
312,739.00
Contribution profit
$
589,907.00
Contributing Margin 30%
Total expense
$1,406,185.0
0
Price (P1) 34.13
Price (P2) 34.81
Y = 218799e3E-
05x
TFC $218,799.00 Cost
$374,890.9522
5
Price $34.81
Revenu
e $374,890.95
Break even
number 10770 Profit $0.00000
Arc Elasticity (mid-point method)
Quantity (Q) Q1 Q2
11253 10770
Price (P) P1 P2
34.13 34.81
Q2-Q1 -483
(Q1+Q2)/2 11011.5
(Q2-Q1)/(Q1+Q2)/2 -0.043863234
P2-P1 0.68
(P1+P2)/2 34.47
(P2-P1)/(P1+P2)/2 0.019727299
Elasticity -2.22

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