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managerial Accounting

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Theater owners have to make competitive bids for the right to show a movie. They must
sent the film distributor a proposal with

1. The length of run they provide.

2. The percentage of box office revenues that the theater will pay the distributor per
week. This usually on a sliding scale. The distributor may get up to 90% for the first week,
70% for the second, and so forth down to a minimum of 35%.Thus the longer the movie
plays, the smaller the percentage the theater owner pays.

In addition, the theater owner must guarantee a minimum total payment to the film
distributor, even if box office revenues are disastrously weak. For some "blockbuster"
movies, the guarantee may exceed $100,000. This guarantee is a fixed cost as long as the
accumulated sliding scale payments are less than the guarantee. Moreover, the sliding scale
payments become variable costs only to the extend that they exceed the guarantee.

A theater owner, Jane is trying to decide how much to guarantee the distributor for a three-
week run of Rocky IX. She has already decided to offer a 90%, 70%, and 50% sliding scale
over the three-week period. The weekly fixed "house expenses" for rent, climate control,
personnel, advertising, and other items are $5,000. The "house expenses" are fixed for the
entire three-week run of the movie. Allowing for lower prices for children, senior citizens,
and matinees, the average price per ticket is $6.

Jane expects to sell 8,000 tickets during the first week, 6,000 during the second, and 4,000
during the third. Her target operating income is $8,000 for the three week run.

(For purposes of this problem, ignore concession operations, which ordinarily add
significantly to a theater profits.)

1. Using Jane's predictions of ticket sales, compute the maximum guarantee that she
should bid.

2. Suppose Jane bids a guarantee of only $60,000. Compute the operating income for
the three-week period if (a) her original target weekly revenues are attained, (b) 65%
of her original target revenues are attained, and (c) 120% of her original target
revenues are attained.

3. Assume that Jane bids a $60,000 guarantee and attains her original target weekly
revenues. Compute (a) the total number of tickets sold where her total costs are no
longer affected by the guarantee, and (b) her breakeven point in terms of tickets
Hint: Compute (a) before (b). A graph could help.

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