CVP, cost structure differences, movie production. (Continuation of 3-23) Royal Rumble is negotiating for Feature Creatures 2, a sequel to its mega-blockbuster success Feature Creatures. This negotiation is proving more difficult than for the original movie. The budgeted production cost (excluding payments to the director Savage and the stars Michaels and Martel) for Feature Creatures 2 is $21 million. The agent negotiating for Savage, Michaels, and Martel proposes either of two contracts:

(A) Fixed salary component of $15 million for Savage, Michaels, and Martel (combined) with no "residual" interest in the revenues from Feature Creatures 2, or

(B) Fixed salary component of $3 million plus a "residual" of 15%> of the revenues Royal Rumble receives from Feature Creatures 2.

Media Productions will market Feature Creatures 2. It agrees to invest a minimum of $10 million of its own money. Because of its major role in the success of Feature Creatures, Media Productions will now be paid 25% of the revenues Royal Rumble receives from the total box-office receipts. Royal Rumble receives 62.5% of the total box-office receipts (out of which comes the 25% payment to Media Productions).

Required 1. What is Royal Rumble's breakeven point expressed in terms of:

a. revenues received by that company

b. total box-office receipts for Feature Creatures 2 for each of the (A) and (B) contract proposals for Savage, Michaels, and Martel1 Explain the difference between the breakeven points for contract proposals (A) and (B).

2. Assume Feature Creatures 2 achieves the same $300 million in box-office revenues as Feature Creatures. What is the operating income to Royal Rumble from Feature Creature ■ 2 it 'it accepts contract proposal (B)? Comment on the difference in operating income between the two films.