3. MULTIPLE-PRODUCT AND MULTI-DECISION COST VOLUME PROFIT ANALYSIS

Rich Gogan, a promoter, is considering the possibility of booking the Wild World of Wrestling (WWW) in the Oxford Futuredome. Currently, due to intense television exposure, the WWW is enjoying great popularity. Rich figures that the possibility of earning money, which would be donated to the building drive to replace the roof on the local curling arena, is pretty good.

The Oxford Futuredome is a domed arena that will seat 60,000 fans as a wrestling or boxing venue. Rich figures that there would be three types of seating: ringside, reserved, and rush. The distribution and the ticket prices for these seats are expected to be as follows:

Seat Type% Total Capacity% Total Ticket SalesPrice

Ringside10%10%$50

Reserved707025

Rush202010

At these prices, total ticket sales are expected to be 45,000.

The costs, associated with such a promotion are high. He rent for the Futuredome is $10,000. The cost of hiring the private security personnel will be $30,000. In addition, a city ordinance requires that police be in attendance. The number of police required depends on the number of customers, and the police cost will be about $1 per customer. The cost of hiring ushers for the event will be $20,000. Clean-up and the repair of property damage caused by the fans is expected to cost $80,000 plus about $2 per fan. Insurance and other incidental costs will be $10,000.

The promotional fee for the event will be $10,000. The basic fee for the wrestlers who will appear on the card is $400,000. In addition, the wrestlers demand, and get, 10% of the gross receipts. The restaurant, snack bars and vendors are controlled by the owners of the Futuredome. Futuredome management requires a flat fee of $100,000 to provide food services for the evening plus 25% (15% for the owners, 10% for the vendors) of the total food sales. The lessor, in this case Rich, must also pay the variable cost of the food provided, which averages $3 per fan. The average sales are $8 per fan. Finally, total sales taxes are 8% on any sales, food or tickets. (All prices provided above include taxes.)

Required:

Consider each case below separately.

1. What is the expected profit from this promotion?
2. Given the anticipated prices and distribution of sales, how many tickets, in total, must be sold for the promotion to break even?
3. An alternative and more expensive, seating plan will increase the rent for the event to $150,000. Under this seating plan, the distribution of seats and sales, would be ringside, 15%; reserved, 70%; and rush, 15%. Is the upgrade to the more expensive seating plan worthwhile?
4. If the food prices were cut so that the average revenue from each customer was $6, the total ticket sales would rise to 48,000. Is this price cut worthwhile?
5. Cutting all ticket prices by 10% is expected to increase total ticket sales by 10%. Is this change worthwhile?
6. One of the main attractions of the event would be a feature match between the Mighty Hercules, the current WWW heavyweight champion, and his archrival. Warren the Weasel. Hercules and Warren could be brought in a few days before the event in order to appear on local television and in some shopping centres. The total cost of the promotion would be $50,000 and would increase ticket sales by 10%. Is the promotion worthwhile?
7. One possibility is to organize a lottery for the available tickets. Under this scheme all tickets to the event would sell for $20, and the names of the customers to be assigned the seats would be drawn randomly by a computer. The additional cost of this alternative would be $50,000, which includes the cost of promoting the lottery, as well as the fee to be paid to the accounting firm that would supervise the lottery. If the lottery were used, all 60,000 seats to the event would probably be sold. Is the lottery worthwhile?