CVP, cost structure differences, movie production (continuation of 3-43). Royal Rumble is negotiating for Feature Creatures 2, a sequel to its mega-blockbuster Feature Creatures. This negotiation is proving more difficult than for the original movie. The bud¬

geted production cost (excluding payments to the director $avage and the stars Michaels and Martel) for Feature Creatures 2 is $25.2 million. The agent negotiating for $avage, Michaels, and Martel proposes either of two contracts:

Contract A. Fixed salary component of $18 million for fiavage, Michaels, and Martel

(combined) with no residual interest in the revenues from Feature Creatures 2.

Contract B. Fixed salary component of $3.6 million for Savage, Michaels, and Martel

(combined) 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 $12 mil¬

lion of its own money. Because of its major role in the success of Feature Creatures, Media Productions will now be paid 2 5 % 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 the breakeven point for Royal Rumble expressed in terms of

(a) Revenues received by that company and

(b) total box office receipts for Feature Creatures 2 for contracts A and B?

Explain the difference between the breakeven points for contracts A and B.

2. Assume Feature Creatures 2 achieves the same $360 million in box office revenues as Feature Creatures. What is the operating income to Royal Rumble from Feature Creatures 2 if it accepts contract B? Comment on the difference in operating income between the two films.