CVP, cost structure differences, movie production (continuation of 8-18). (20 minutes) Espasso is negotiating for Tornado 2,a sequel to its mega-blockbuster Jornado. This negotiation is proving more difficult than for the original movie. The budgeted production cost (excluding payments to the director Vieira and the stars Moura and Rebello) for Tornado 2 is EUR 21 million. The agent negotiating for Vieira, Moura and Rebello proposes either of two contracts:

Contract A: Fixed-salary component of EUR 15 million for Vieira, Moura and Rebello (combined) with no residual interest in the revenues from Tornado 2.

Contract B: Fixed-salary component of EUR 3 million for Vieira, Moura and Rebello (combined) plus a residual of 15% of the revenues Espasso receives from 7ornado 2.

Artes e Media will market Zornado 2. It agrees to invest a minimum of EUR 10 million of its own money. Because of its major role in the success of Tornado, Artes e Media will now be paid 25% of the revenues Espasso receives from the total box-office receipts. Espasso receives 62.5% of the total box-office receipts (out of which comes the 25% payment to Artes e Media).

REQUIRED 1, What is the breakeven point for Espasso expressed in terms of

a. revenues received by that company

b. total box-office receipts for Tornado 2 for contracts A and B? Explain the difference between the breakeven points for contracts A and B.

Assume 7ornado 2 achieves the same EUR 300 million in box-office revenues as Tornado, What is the operating income to Espasso from Tornado 2 if it accepts contract B? Comment on the difference in operating income between the two films.  lop1