1. How would you describe the competitive strategy of Walnut Creek amphitheatre? Given the firm's strategy, what are the most important Key Performance Indicators (e.g., quantitative measures) for Walnut Creek to track and manage if it is to achieve its goal of continuous annual growth in operating income? 2. Complete the following two cost-volume-profit analyses for the show illustrated in Exhibit 2, the KFBS Allstars: How many tickets must Walnut Creek sell to break even? (Hint: don't ignore the possibility that the attendance of Comp ticket holders affects the concert's profitability). i. . Do you think that it is likely that Walnut Creek will break even? Briefly explain. ii. Given your estimated breakeven point in units, compute the Margin of Safety (MOS) in units. Briefly comment on the MOS result. How many tickets must Walnut Creek sell to earn $30,000 operating income after taxes, assuming a 40 percent tax rate? Is it reasonable to assume this level of operating income will be achieved? Briefly explain. b. What should be the average ticket price (for all ticket types combined-A through D) for the KFBS concert if the fixed-pay fee is $200,000 (rather than $160,635) and Walnut Creek expects to sell 7,000 tickets and wants to earn $30,000 operating income after 40 percent in taxes? After you estimate the average ticket price for all ticket types combined (which is $22.12 for the situation depicted in Exhibit 2), estimate the price for each type of seat (i.e., in Exhibit 2: A--$36.29, B--$22.22, C--$11.31, D--$4.92). [Hint: assume sales mix for A, B, C, and D seats remains the same as the mix in the Flash Report (Exhibit 2).] 3. 4. Negotiating the talent fee for the KFBS Allstars is an important strategic decision for Walnut Creek management. Perform the following two independent scenario analyses regarding different talent fee arrangements. Then comment briefly on what the results of your two scenario analyses suggest regarding whether Walnut Creek is better off negotiating a "fixed-pay" contract with performers or a "per capita" contract with performers: What is the maximum fixed fee that Walnut Creek can pay KFBS Allstars if Walnut Creek wants to earn $45,000 operating income after 40 percent tax and still expects the show to have an average ticket price of $22.12? Assume, including the same 25 percent comp tickets (i.e., 4:1 mix as before), the show is expected to be a sell-out. . b. Independent of (a), what is the maximum per capita fee (see p. 557 of the case for the reference of the 2.5 percent comp tickets at per capita shows) that Walnut Creek can pay the KFBS Allstars, whose concert is expected to be a sellout, if the Pavilion wants to earn $180,000 operating income after 40 percent tax from an average ticket price of $22.12 per ticket? ISSUES IN ACCOUNTING EDUCATION Vol. 19. No, 4 pp. 555-561 The Walnut Creek Amphitheatre: A Strategy and CVP Case Analysis Edward Blocher and Kung H. Chen ABSTRACT: The Walnut Creek Amphitheatre (Walnut Creek) case is intended for the undergraduate management accounting or cost accounting course and the M.B.A. management accounting course. It provides an excellent context in which to examine strategic issues in using cost volume profit (CVP) in a service business. Based on an actual entertainment pavilion, the case develops many factors unique to a service business and illustrates how pavilion management can use CVP analysis to determine which artists to attract and what kinds of contracts to have with these performers. The Pavilion has two types of customers (paying ticket holders and free ticket holders) and earns profits from three types of revenues (ticket revenues, concession revenues, and parking fees). The case requires you to identify the best strategy for different types of artists, conduct cost-volume-profit analyses, consider the strategic issues related to operating leverage and how this affects the choice of performer and contract, and assess pricing strategies. ne day in early November, Pam Berg, Manager of the Walnut Creek Amphitheatre (previously named the Time Warner Music Pavilion), was reviewing the operating results for the year just completed in preparation for the executive board meeting the following Friday. While the year ended in the black, she was disappointed that Walnut Creek failed to earn the budgeted profit goal. This was the second year since Ms. Berg assumed the manager's position at Walnut Creek. After the somewhat disappointing first year, she was determined to exceed the budgeted profit in the coming year. While not all events developed exactly as expected at the time of preparing the budget for the year, there were no major surprises during the year. Yet, the operating results are below the budgeted goal. In addition, Pam was frustrated by the lack of clear guidelines for contract negotiations with artists, for setting ticket prices, and in dealing with unexpected low ticket sales for certain concerts. THE WALNUT CREEK AMPHITHEATRE FOR LIVE ENTERTAINMENT The Walnut Creek Amphitheatre in Raleigh, North Carolina (walnutcreekamphitheatre.com an outdoor amphitheater that provides live concerts to the public from April through October each year, hosting as many as half a million patrons a year. The seven-month season usually hosts an average of 40 concerts, and 12 year-round staff plan and manage each season. SFX Entertainment Inc. (or LiveStyle) operates the pavilion. SFX is one of the largest diversified promoters, producers, and venue operators for live entertainment events in the United States. It has 71 venues either directly owned or operated under lease or exclusive booking arrangements in 29 of the top 50 U.S. markets, including 14 amphitheaters or pavilions in 9 of the top 10 markets. is 555 Walnut Creek wants to be the nightlife for the Triangle (Raleigh-Durham-Chapel Hill, NC) and eastern North Carolina, and one of the most beautiful, technologically advanced, and successful amphitheaters in the world. It features the most modern state-of-the-art acoustics and video of any facility of its kind. In the last few years, Walnut Creek staged shows by the Dave Matthews Band, Coldplay, Drake, Alan Jackson, Blink 182, Toby Keith, Santana, Lil Wayne, Tim McGraw, Aerosmith, James Taylor, Sting, Jimmy Buffett, and many other national, regional, and local artists. It also hosts major events, such as Lollapalooza, JazzFest and Mayhem Festival. The Pavilion claims, "There isn't a bad seat in the house. Whether you choose to spread a blanket on our gently sloping festival lawn or select a reserved seat in our pavilion seating area, you are guaranteed a great view of the action on the stage". Exhibit 1 shows the stage and seating of the amphitheater. History/Development The city of Raleigh and Pace Entertainment Company of Houston, Texas jointly built the Walnut Creek Amphitheatre in 1991. Pace Entertainment and Cellar Door Inc. of Raleigh, NC had the initial contract to manage the Pavilion. Hardee's Food Systems, Inc. of Rocky Mount, NC, the original sponsor of the amphitheater, paid an annual fee to carry its name and logo on all signs and ads regarding the amphitheater. On February 3, 1999, Walnut Creek became the title sponsor for the amphitheater. The demand for the outdoor facility came about because the rapidly growing city of Raleigh lacked a major entertainment complex. In the late 1980s Pace Entertainment and the city of Raleigh came to an agreement to build the facility. The city of Raleigh would own the land while Pace Entertainment would own the facility and assume sole operations of the facility; Cellar Door would do the booking for all the concerts. Pace Entertainment would pay income taxes on earnings from the use of the facility. In 1998, SFX Entertainment Inc. acquired Pace Entertainment Inc. The amphitheater facility and its employees became part of SFX Entertainment Inc. Also, in 1999 SFX Entertainment Inc. acquired Cellar Door Inc. and merged with Clear Channel Communications Inc., one of the largest owners of radio stations in the country. This move brought together both worlds of the entertainment business. While the company has diverse holdings, the philosophy of SFX is "One Company, One Mission." Many companies that are now owned by SFX were at one time bitter rivals in the concert promoting business. These companies now maintain good working relationships within SFX. A key goal for SFX is for the net operating income of each of its holdings, including Walnut Creek, to grow 5 percent each year. The Pavilion competes with PNC Arena (http://www.pnccenter.com) at North Carolina State University in Raleigh (NCSU), the Dean Smith Activities Center (http://www.goheels.com/ViewArticle.dbml?ATCLID-205720085) at The University of North Carolina in Chapel Hill, NC (UNC), and the Verizon Wireless Amphitheater in Charlotte, NC (http://www.pncmusicpav.com), among others. In contrast to the facilities at NCSU and UNC that offer only indoor events, the Pavilion offers outdoor as well as sheltered seating for its events. Marketing, Operations, and Accounting When the marketing department plans a promotion for an upcoming event, it coordinates with the sales department to see if there is a conflict in sponsorship. Marketing also coordinates with the operations department to effectively manage the activities on show days. Finally, the budget of each department (sales, marketing, and operations) is reviewed by the accounting department, which provides overall financial management of the project. Bringing Concerts to Reality A concert becomes reality in many steps. First, a group or performer with an interest in performing at Walnut Creek will discuss with Cellar Door, Inc. and Walnut Creek the possibility of performing at the amphitheatre, and look at the open dates. Upon reaching an agreement, Cellar Door, on behalf of Walnut Creek, signs a contract with the booking agent for the performer. A time is specified for gate openings, and once the gate is opened the show is underway. The job of the staff during a concert is to make sure every customer of Walnut Creek has a pleasant experience and that the mission of the company is clearly seen by everyone that "a concert ... it's better live." Clean Sweep Inc. of Raleigh handles the cleanup after a show. Key Business Issues Marketing has an important role in the success of the Walnut Creek amphitheatre, but marketing expenditures are carefully watched. For every show, the marketing budget is limited to $20,000. For many shows it is difficult to stay within the budget, since the Pavilion serves a five-market region consisting of Raleigh-Durham, Fayetteville, Wilmington, Greensboro, and the Carolina Coast. Most of the marketing budget is spent on advertising with radio, TV, and print media in the designated regions. Prior to developing advertising plans, the marketing staff analyzes ticket sales geographically over the five-market region. It is important to know the demographics of the five regions and compare them with the profile for each performer. The more Walnut Creek can know about the fans, the more they know where to spend the $20,000. SFX develops measures of performance and profitability for each advertising media, by region. This type of analysis is important to Walnut Creek because increased ticket sales, through effective advertising, not only affect ticket revenues, but also revenues from parking, merchandise, and concessions. It is also important because of the increased cost of advertising. The advertising rates in the Raleigh-Durham region are comparable to the rates in Washington, D.C. The rates are up 200 percent over the last five years, while the budgets per show are only up 15 percent over this time. The cost of the performing artist has also increased dramatically. The average fee for an artist is approximately $160,000. Some artists are paid on a fixed-fee basis, while others are paid on a per capita basis. Generally, the most popular artists seek a per capita contract because they are confident of a high level of attendance. In contrast, the artist paid a fixed-fee is guaranteed the same fee whether 100 or 20,000 people attend (the capacity of the amphitheatre is approximately 20,000 attendance). On average, the total number of paid tickets per fixed-fee concert is 7,000. The role of marketing and advertising is especially important for fixed-fee shows. One method Walnut Creek uses in addition to advertising is to distribute "comp" tickets (comp tickets are free tickets distributed throughout the community) to build interest in the Pavilion that will later be realized in paying customers. Comp customers also bring in revenue for parking, concessions, and merchandise sales. In a fixed-fee concert, the number of comp tickets is approximately 25 percent of the number of paying tickets, while a per capita show has no more than 2.5 percent. Because of the increasing cost of the performing artists, Walnut Creek tries to reduce nonartist costs. Nonartist costs at Walnut Creek include expenses for sales, marketing, parking, security, concessions, and merchandise. Since assuming the manager position, Pam has developed several avenues to reduce nonartist costs and/or increase revenues and profits, including reducing expenses, having the parking service pass out flyers for upcoming events, trading "comp" tickets for online spots in the radio industry, and giving local businesses tickets in exchange for advertising on their premises. Revenues, Costs, and Flash Report for the KFBS Allstars Concert Exhibit 2 is a mock flash report for an illustrative fixed-fee show, the KFBS Allstars. A flash report is a projection of costs and revenues for a scheduled concert. The guarantee/talent cost ($160,635) is the amount the KFBS Allstars are guaranteed for the show. Projected sales is the number of projected paying ticket holders, while the "drop count" is total attendance, including both paid and comp tickets. Setting ticket price is often done together with the performer, taking into consideration SFX's national and regional pricing policies, prices of comparable venues, and the Pavilion's desired profit for the concert. Pam uses the flash report to plan potential concerts and to evaluate the success of concerts already presented. The report shows the variety of revenues and costs for a concert, and the projected profit for the concert. The flash report projects total revenues including ticket sales, parking, food, and merchandise based on per capita (drop count) rates. Ticket sales are in four ticket categories: A seats and B seats are regular price tickets for the reserved and lawn seating sections respectively; C and D seats are promotional (discount) price tickets for reserved and lawn seating, respectively. Other revenues include per capita facility charges paid by the sponsoring corporation for naming rights (based on paid ticket holders) and a per capita service charge paid by the performer for food, transportation, and other services. Not included are the annual lease payments for VIP seats at $10,000 per year. Patrons to the VIP seats also have to pay the ticket price of A-level seats. Reserved and lawn seating areas are shown in Exhibit 1. The parking, food concession, and merchandise operations are outsourced to other service providers, so the direct costs for parking, merchandise and concessions are determined based on contracts with the service providers that include both a percentage (10 percent) of applicable revenues and a fixed fee. Operating expenses include an allocation of the total of fixed production and operations costs for the season, the advertising expenses for the KFBS Allstars event, and other variable expenses. These are then added to the direct costs for concessions, merchandise, parking, and insurance to determine total operating expenses. EXHIBIT 1 Walnut Creek Amphitheatre Pavilion Stage and Seating Walnut Creek can accommodate 20,000 fans with 7,000 reserved seats directly in front of the stage (covered seating in sections 1 through 9 and VIP seating) and another 13,000 on the spacious lawn. It has 78 theater-style VIP boxes that can accommodate 4, 6, or 8 people. In addition to positioning for prime viewing, patrons in VIP boxes also enjoy amenities such as wait staff service at their seats, personalized parking, and exclusive membership to the VIP Bar & Grill. Directly in front of sections 4, 5, 8, and 9 is seating with an elevated floor that provides excellent views of the stage for patrons with disabilities and additional seating for the hearing or visually impaired. Lawn Seating 3 Reserved, Covered STAGE Seating EXHIBIT 2 (continued) EXHIBIT 2 Other Direct Costs Flash Report for the KFBS Allstars Concert PARKING CONTRACT $4,448 ARTIST NAME The KFBS Allstars CONCESSION CONTRACT $43,356 $17,826 $226,265 ACTIVITY/EVENT NUMBER 1031001. EVENT MONTH MERCHANDISE CONTRACT EVENT DATE 7/31/20X4 TOTAL DIRECT COSTS Projected Sales (number of Seats) A Seats B Seats C Seats D Seats Per capita $21.86 2,778 PERCENT OF SALES 63.20% 2,845 TOTAL REVENUE (from above) TOTAL DIRECT COSTS (from above) $358,141 $226,265 $131,876 1,747 881 TOTAL Number of Seats 8,251 GROSS PROFIT Projected Ticket Price A Seats B Seats C Seats D Seats Operating Expenses $36.29 TOTAL PRODUCTION EXPENSE $15,506 $22.22 TOTAL OPERATIONS EXPENSE $14,991 $11.31 TOTAL OTHER VAR. EXPENSE $14,323 $4.92 $20,030 $64,850 PROJECTED NET AFTER TAX ADMISSIONS $182,479 TOTAL ADVERTISING EXPENSE AVG TIX PRICE NET OF TAX PER PAYING PATRON $22.12 TOTAL OPERATING EXPENSE TALENT % 88.03% Per capita S6.27 GUARANTEE TALENT COSTS $160,635 PERCENT OF SALES 18.1% NUMBER PERFORMANCES 1 OPERATING INCOME S67,026 DROP COUNT (inchudes comp tickets) Other Ticket-Related Revenue 10,349 Per capita $6.48 $24,010 $2.91 FACILITY CHARGE PERCENT OF SALES 18.7% Per capita Detail: Other Concert Variable Expense $16,172 $1.96 $222,673 $26.99 SERVICE CHARGE Per capita Insurance Expense per person $0.17 REVENUE FROM TICKETING COGS-Concession per person COGS-Merchandise Inventory per person COGS-parking per person Other Variable Concert Expense per person Per capita $0.35 ANCILLARY REVENUES $1.12 PARKING $19,767 $0.08 Per capita FOOD CONCESSIONS Per capita $1.91 $0.02 $79,273 TOTAL OTHER VARIABLE EXPENSE $14,323 $7.66 $36,428 $3.52 MERCHANDISE Per capita RENTALS $0.00 REVENUE FROM ANCILLARIES $135,468 Per capita $13.09 TOTAL REVENUE $358,141 Per capita $34.61 5. Walnut Creek management examined the results of the scenarios examined in requirement 4 and subsequently held additional discussions with Walnut Creek's marketing team. The biggest uncertainty for Walnut Creek concerns the number of paying ticket patrons for lesser known performers. As a result, Walnut Creek management believes that the two most likely contract structure scenarios it will face when negotiating contracts with lesser known performers (i.e., bands) will be as follows. The first structure is per-capita in nature (Alternative 1) and would pay the performer a fee of $20 per paid ticket holder. The second structure is fixed in nature (Alternative 2) and would pay the performer a flat fee of $250,000. a. Assuming the same other relevant information from the case, calculate the indifference point for these two fee contract structures. Be sure to SHOW YOUR CALCULATIONS. Briefly explain what this indifference point means. b. What profit is earned by Walnut Creek at this indifference point? Be sure to SHOW YOUR CALCULATIONS. Walnut Creek's marketing team estimates that it will be able to sell 10,000 tickets for the hot new band-The Don't Suck. Explain which contract structure Walnut Creek should pursue with The Don't Suck band negotiations and WHY this particular structure is best for Walnut Creek. . What role does CVP analysis and operating leverage play in contract negotiations with different types of performers (fixed-fee or per capita)? 6. 7. The results of CVP analyses are extremely useful for decision making. However, they also are highly dependent upon the assumptions used to generate the inputs into the CVP analyses. Preferably using an Excel spreadsheet (although you may simply use paper instead if you so desire), rerun the following two CVP analyses but take into account the sensitivity changes (i.e., changes in key assumptions) described below: The break even analysis for requirement 2a: Assume now that the number of comp tickets in a fixed-fee concert is only 10 percent (rather than 25 percent as on p. 557 of the case). What is the break even point in units given this change? . b. The maximum fixed-fee that Walnut Creek can pay in requirement 4a: Assume now that after the KFBS Allstar show is arranged (i.e., can't be moved or canceled), another unexpected big event becomes scheduled for the same evening as the KFBS Allstar show (e.g., Presidential debate, the Oscars, Cubs in another World Series Game 7, etc.). As a result, assume that the KFBS Allstar show draws only 3,000 paying ticket holders. What is the maximum fixed-fee that Walnut Creek can pay given this change? c. Explain any insights that the analyses in parts (a) and (b) revealed regarding the use of CVP for Walnut Creek's strategic decision making. 1. How would you describe the competitive strategy of Walnut Creek amphitheatre? Given the firm's strategy, what are the most important Key Performance Indicators (e.g., quantitative measures) for Walnut Creek to track and manage if it is to achieve its goal of continuous annual growth in operating income? 2. Complete the following two cost-volume-profit analyses for the show illustrated in Exhibit 2, the KFBS Allstars: How many tickets must Walnut Creek sell to break even? (Hint: don't ignore the possibility that the attendance of Comp ticket holders affects the concert's profitability). i. . Do you think that it is likely that Walnut Creek will break even? Briefly explain. ii. Given your estimated breakeven point in units, compute the Margin of Safety (MOS) in units. Briefly comment on the MOS result. How many tickets must Walnut Creek sell to earn $30,000 operating income after taxes, assuming a 40 percent tax rate? Is it reasonable to assume this level of operating income will be achieved? Briefly explain. b. What should be the average ticket price (for all ticket types combined-A through D) for the KFBS concert if the fixed-pay fee is $200,000 (rather than $160,635) and Walnut Creek expects to sell 7,000 tickets and wants to earn $30,000 operating income after 40 percent in taxes? After you estimate the average ticket price for all ticket types combined (which is $22.12 for the situation depicted in Exhibit 2), estimate the price for each type of seat (i.e., in Exhibit 2: A--$36.29, B--$22.22, C--$11.31, D--$4.92). [Hint: assume sales mix for A, B, C, and D seats remains the same as the mix in the Flash Report (Exhibit 2).] 3. 4. Negotiating the talent fee for the KFBS Allstars is an important strategic decision for Walnut Creek management. Perform the following two independent scenario analyses regarding different talent fee arrangements. Then comment briefly on what the results of your two scenario analyses suggest regarding whether Walnut Creek is better off negotiating a "fixed-pay" contract with performers or a "per capita" contract with performers: What is the maximum fixed fee that Walnut Creek can pay KFBS Allstars if Walnut Creek wants to earn $45,000 operating income after 40 percent tax and still expects the show to have an average ticket price of $22.12? Assume, including the same 25 percent comp tickets (i.e., 4:1 mix as before), the show is expected to be a sell-out. . b. Independent of (a), what is the maximum per capita fee (see p. 557 of the case for the reference of the 2.5 percent comp tickets at per capita shows) that Walnut Creek can pay the KFBS Allstars, whose concert is expected to be a sellout, if the Pavilion wants to earn $180,000 operating income after 40 percent tax from an average ticket price of $22.12 per ticket? ISSUES IN ACCOUNTING EDUCATION Vol. 19. No, 4 pp. 555-561 The Walnut Creek Amphitheatre: A Strategy and CVP Case Analysis Edward Blocher and Kung H. Chen ABSTRACT: The Walnut Creek Amphitheatre (Walnut Creek) case is intended for the undergraduate management accounting or cost accounting course and the M.B.A. management accounting course. It provides an excellent context in which to examine strategic issues in using cost volume profit (CVP) in a service business. Based on an actual entertainment pavilion, the case develops many factors unique to a service business and illustrates how pavilion management can use CVP analysis to determine which artists to attract and what kinds of contracts to have with these performers. The Pavilion has two types of customers (paying ticket holders and free ticket holders) and earns profits from three types of revenues (ticket revenues, concession revenues, and parking fees). The case requires you to identify the best strategy for different types of artists, conduct cost-volume-profit analyses, consider the strategic issues related to operating leverage and how this affects the choice of performer and contract, and assess pricing strategies. ne day in early November, Pam Berg, Manager of the Walnut Creek Amphitheatre (previously named the Time Warner Music Pavilion), was reviewing the operating results for the year just completed in preparation for the executive board meeting the following Friday. While the year ended in the black, she was disappointed that Walnut Creek failed to earn the budgeted profit goal. This was the second year since Ms. Berg assumed the manager's position at Walnut Creek. After the somewhat disappointing first year, she was determined to exceed the budgeted profit in the coming year. While not all events developed exactly as expected at the time of preparing the budget for the year, there were no major surprises during the year. Yet, the operating results are below the budgeted goal. In addition, Pam was frustrated by the lack of clear guidelines for contract negotiations with artists, for setting ticket prices, and in dealing with unexpected low ticket sales for certain concerts. THE WALNUT CREEK AMPHITHEATRE FOR LIVE ENTERTAINMENT The Walnut Creek Amphitheatre in Raleigh, North Carolina (walnutcreekamphitheatre.com an outdoor amphitheater that provides live concerts to the public from April through October each year, hosting as many as half a million patrons a year. The seven-month season usually hosts an average of 40 concerts, and 12 year-round staff plan and manage each season. SFX Entertainment Inc. (or LiveStyle) operates the pavilion. SFX is one of the largest diversified promoters, producers, and venue operators for live entertainment events in the United States. It has 71 venues either directly owned or operated under lease or exclusive booking arrangements in 29 of the top 50 U.S. markets, including 14 amphitheaters or pavilions in 9 of the top 10 markets. is 555 Walnut Creek wants to be the nightlife for the Triangle (Raleigh-Durham-Chapel Hill, NC) and eastern North Carolina, and one of the most beautiful, technologically advanced, and successful amphitheaters in the world. It features the most modern state-of-the-art acoustics and video of any facility of its kind. In the last few years, Walnut Creek staged shows by the Dave Matthews Band, Coldplay, Drake, Alan Jackson, Blink 182, Toby Keith, Santana, Lil Wayne, Tim McGraw, Aerosmith, James Taylor, Sting, Jimmy Buffett, and many other national, regional, and local artists. It also hosts major events, such as Lollapalooza, JazzFest and Mayhem Festival. The Pavilion claims, "There isn't a bad seat in the house. Whether you choose to spread a blanket on our gently sloping festival lawn or select a reserved seat in our pavilion seating area, you are guaranteed a great view of the action on the stage". Exhibit 1 shows the stage and seating of the amphitheater. History/Development The city of Raleigh and Pace Entertainment Company of Houston, Texas jointly built the Walnut Creek Amphitheatre in 1991. Pace Entertainment and Cellar Door Inc. of Raleigh, NC had the initial contract to manage the Pavilion. Hardee's Food Systems, Inc. of Rocky Mount, NC, the original sponsor of the amphitheater, paid an annual fee to carry its name and logo on all signs and ads regarding the amphitheater. On February 3, 1999, Walnut Creek became the title sponsor for the amphitheater. The demand for the outdoor facility came about because the rapidly growing city of Raleigh lacked a major entertainment complex. In the late 1980s Pace Entertainment and the city of Raleigh came to an agreement to build the facility. The city of Raleigh would own the land while Pace Entertainment would own the facility and assume sole operations of the facility; Cellar Door would do the booking for all the concerts. Pace Entertainment would pay income taxes on earnings from the use of the facility. In 1998, SFX Entertainment Inc. acquired Pace Entertainment Inc. The amphitheater facility and its employees became part of SFX Entertainment Inc. Also, in 1999 SFX Entertainment Inc. acquired Cellar Door Inc. and merged with Clear Channel Communications Inc., one of the largest owners of radio stations in the country. This move brought together both worlds of the entertainment business. While the company has diverse holdings, the philosophy of SFX is "One Company, One Mission." Many companies that are now owned by SFX were at one time bitter rivals in the concert promoting business. These companies now maintain good working relationships within SFX. A key goal for SFX is for the net operating income of each of its holdings, including Walnut Creek, to grow 5 percent each year. The Pavilion competes with PNC Arena (http://www.pnccenter.com) at North Carolina State University in Raleigh (NCSU), the Dean Smith Activities Center (http://www.goheels.com/ViewArticle.dbml?ATCLID-205720085) at The University of North Carolina in Chapel Hill, NC (UNC), and the Verizon Wireless Amphitheater in Charlotte, NC (http://www.pncmusicpav.com), among others. In contrast to the facilities at NCSU and UNC that offer only indoor events, the Pavilion offers outdoor as well as sheltered seating for its events. Marketing, Operations, and Accounting When the marketing department plans a promotion for an upcoming event, it coordinates with the sales department to see if there is a conflict in sponsorship. Marketing also coordinates with the operations department to effectively manage the activities on show days. Finally, the budget of each department (sales, marketing, and operations) is reviewed by the accounting department, which provides overall financial management of the project. Bringing Concerts to Reality A concert becomes reality in many steps. First, a group or performer with an interest in performing at Walnut Creek will discuss with Cellar Door, Inc. and Walnut Creek the possibility of performing at the amphitheatre, and look at the open dates. Upon reaching an agreement, Cellar Door, on behalf of Walnut Creek, signs a contract with the booking agent for the performer. A time is specified for gate openings, and once the gate is opened the show is underway. The job of the staff during a concert is to make sure every customer of Walnut Creek has a pleasant experience and that the mission of the company is clearly seen by everyone that "a concert ... it's better live." Clean Sweep Inc. of Raleigh handles the cleanup after a show. Key Business Issues Marketing has an important role in the success of the Walnut Creek amphitheatre, but marketing expenditures are carefully watched. For every show, the marketing budget is limited to $20,000. For many shows it is difficult to stay within the budget, since the Pavilion serves a five-market region consisting of Raleigh-Durham, Fayetteville, Wilmington, Greensboro, and the Carolina Coast. Most of the marketing budget is spent on advertising with radio, TV, and print media in the designated regions. Prior to developing advertising plans, the marketing staff analyzes ticket sales geographically over the five-market region. It is important to know the demographics of the five regions and compare them with the profile for each performer. The more Walnut Creek can know about the fans, the more they know where to spend the $20,000. SFX develops measures of performance and profitability for each advertising media, by region. This type of analysis is important to Walnut Creek because increased ticket sales, through effective advertising, not only affect ticket revenues, but also revenues from parking, merchandise, and concessions. It is also important because of the increased cost of advertising. The advertising rates in the Raleigh-Durham region are comparable to the rates in Washington, D.C. The rates are up 200 percent over the last five years, while the budgets per show are only up 15 percent over this time. The cost of the performing artist has also increased dramatically. The average fee for an artist is approximately $160,000. Some artists are paid on a fixed-fee basis, while others are paid on a per capita basis. Generally, the most popular artists seek a per capita contract because they are confident of a high level of attendance. In contrast, the artist paid a fixed-fee is guaranteed the same fee whether 100 or 20,000 people attend (the capacity of the amphitheatre is approximately 20,000 attendance). On average, the total number of paid tickets per fixed-fee concert is 7,000. The role of marketing and advertising is especially important for fixed-fee shows. One method Walnut Creek uses in addition to advertising is to distribute "comp" tickets (comp tickets are free tickets distributed throughout the community) to build interest in the Pavilion that will later be realized in paying customers. Comp customers also bring in revenue for parking, concessions, and merchandise sales. In a fixed-fee concert, the number of comp tickets is approximately 25 percent of the number of paying tickets, while a per capita show has no more than 2.5 percent. Because of the increasing cost of the performing artists, Walnut Creek tries to reduce nonartist costs. Nonartist costs at Walnut Creek include expenses for sales, marketing, parking, security, concessions, and merchandise. Since assuming the manager position, Pam has developed several avenues to reduce nonartist costs and/or increase revenues and profits, including reducing expenses, having the parking service pass out flyers for upcoming events, trading "comp" tickets for online spots in the radio industry, and giving local businesses tickets in exchange for advertising on their premises. Revenues, Costs, and Flash Report for the KFBS Allstars Concert Exhibit 2 is a mock flash report for an illustrative fixed-fee show, the KFBS Allstars. A flash report is a projection of costs and revenues for a scheduled concert. The guarantee/talent cost ($160,635) is the amount the KFBS Allstars are guaranteed for the show. Projected sales is the number of projected paying ticket holders, while the "drop count" is total attendance, including both paid and comp tickets. Setting ticket price is often done together with the performer, taking into consideration SFX's national and regional pricing policies, prices of comparable venues, and the Pavilion's desired profit for the concert. Pam uses the flash report to plan potential concerts and to evaluate the success of concerts already presented. The report shows the variety of revenues and costs for a concert, and the projected profit for the concert. The flash report projects total revenues including ticket sales, parking, food, and merchandise based on per capita (drop count) rates. Ticket sales are in four ticket categories: A seats and B seats are regular price tickets for the reserved and lawn seating sections respectively; C and D seats are promotional (discount) price tickets for reserved and lawn seating, respectively. Other revenues include per capita facility charges paid by the sponsoring corporation for naming rights (based on paid ticket holders) and a per capita service charge paid by the performer for food, transportation, and other services. Not included are the annual lease payments for VIP seats at $10,000 per year. Patrons to the VIP seats also have to pay the ticket price of A-level seats. Reserved and lawn seating areas are shown in Exhibit 1. The parking, food concession, and merchandise operations are outsourced to other service providers, so the direct costs for parking, merchandise and concessions are determined based on contracts with the service providers that include both a percentage (10 percent) of applicable revenues and a fixed fee. Operating expenses include an allocation of the total of fixed production and operations costs for the season, the advertising expenses for the KFBS Allstars event, and other variable expenses. These are then added to the direct costs for concessions, merchandise, parking, and insurance to determine total operating expenses. EXHIBIT 1 Walnut Creek Amphitheatre Pavilion Stage and Seating Walnut Creek can accommodate 20,000 fans with 7,000 reserved seats directly in front of the stage (covered seating in sections 1 through 9 and VIP seating) and another 13,000 on the spacious lawn. It has 78 theater-style VIP boxes that can accommodate 4, 6, or 8 people. In addition to positioning for prime viewing, patrons in VIP boxes also enjoy amenities such as wait staff service at their seats, personalized parking, and exclusive membership to the VIP Bar & Grill. Directly in front of sections 4, 5, 8, and 9 is seating with an elevated floor that provides excellent views of the stage for patrons with disabilities and additional seating for the hearing or visually impaired. Lawn Seating 3 Reserved, Covered STAGE Seating EXHIBIT 2 (continued) EXHIBIT 2 Other Direct Costs Flash Report for the KFBS Allstars Concert PARKING CONTRACT $4,448 ARTIST NAME The KFBS Allstars CONCESSION CONTRACT $43,356 $17,826 $226,265 ACTIVITY/EVENT NUMBER 1031001. EVENT MONTH MERCHANDISE CONTRACT EVENT DATE 7/31/20X4 TOTAL DIRECT COSTS Projected Sales (number of Seats) A Seats B Seats C Seats D Seats Per capita $21.86 2,778 PERCENT OF SALES 63.20% 2,845 TOTAL REVENUE (from above) TOTAL DIRECT COSTS (from above) $358,141 $226,265 $131,876 1,747 881 TOTAL Number of Seats 8,251 GROSS PROFIT Projected Ticket Price A Seats B Seats C Seats D Seats Operating Expenses $36.29 TOTAL PRODUCTION EXPENSE $15,506 $22.22 TOTAL OPERATIONS EXPENSE $14,991 $11.31 TOTAL OTHER VAR. EXPENSE $14,323 $4.92 $20,030 $64,850 PROJECTED NET AFTER TAX ADMISSIONS $182,479 TOTAL ADVERTISING EXPENSE AVG TIX PRICE NET OF TAX PER PAYING PATRON $22.12 TOTAL OPERATING EXPENSE TALENT % 88.03% Per capita S6.27 GUARANTEE TALENT COSTS $160,635 PERCENT OF SALES 18.1% NUMBER PERFORMANCES 1 OPERATING INCOME S67,026 DROP COUNT (inchudes comp tickets) Other Ticket-Related Revenue 10,349 Per capita $6.48 $24,010 $2.91 FACILITY CHARGE PERCENT OF SALES 18.7% Per capita Detail: Other Concert Variable Expense $16,172 $1.96 $222,673 $26.99 SERVICE CHARGE Per capita Insurance Expense per person $0.17 REVENUE FROM TICKETING COGS-Concession per person COGS-Merchandise Inventory per person COGS-parking per person Other Variable Concert Expense per person Per capita $0.35 ANCILLARY REVENUES $1.12 PARKING $19,767 $0.08 Per capita FOOD CONCESSIONS Per capita $1.91 $0.02 $79,273 TOTAL OTHER VARIABLE EXPENSE $14,323 $7.66 $36,428 $3.52 MERCHANDISE Per capita RENTALS $0.00 REVENUE FROM ANCILLARIES $135,468 Per capita $13.09 TOTAL REVENUE $358,141 Per capita $34.61 5. Walnut Creek management examined the results of the scenarios examined in requirement 4 and subsequently held additional discussions with Walnut Creek's marketing team. The biggest uncertainty for Walnut Creek concerns the number of paying ticket patrons for lesser known performers. As a result, Walnut Creek management believes that the two most likely contract structure scenarios it will face when negotiating contracts with lesser known performers (i.e., bands) will be as follows. The first structure is per-capita in nature (Alternative 1) and would pay the performer a fee of $20 per paid ticket holder. The second structure is fixed in nature (Alternative 2) and would pay the performer a flat fee of $250,000. a. Assuming the same other relevant information from the case, calculate the indifference point for these two fee contract structures. Be sure to SHOW YOUR CALCULATIONS. Briefly explain what this indifference point means. b. What profit is earned by Walnut Creek at this indifference point? Be sure to SHOW YOUR CALCULATIONS. Walnut Creek's marketing team estimates that it will be able to sell 10,000 tickets for the hot new band-The Don't Suck. Explain which contract structure Walnut Creek should pursue with The Don't Suck band negotiations and WHY this particular structure is best for Walnut Creek. . What role does CVP analysis and operating leverage play in contract negotiations with different types of performers (fixed-fee or per capita)? 6. 7. The results of CVP analyses are extremely useful for decision making. However, they also are highly dependent upon the assumptions used to generate the inputs into the CVP analyses. Preferably using an Excel spreadsheet (although you may simply use paper instead if you so desire), rerun the following two CVP analyses but take into account the sensitivity changes (i.e., changes in key assumptions) described below: The break even analysis for requirement 2a: Assume now that the number of comp tickets in a fixed-fee concert is only 10 percent (rather than 25 percent as on p. 557 of the case). What is the break even point in units given this change? . b. The maximum fixed-fee that Walnut Creek can pay in requirement 4a: Assume now that after the KFBS Allstar show is arranged (i.e., can't be moved or canceled), another unexpected big event becomes scheduled for the same evening as the KFBS Allstar show (e.g., Presidential debate, the Oscars, Cubs in another World Series Game 7, etc.). As a result, assume that the KFBS Allstar show draws only 3,000 paying ticket holders. What is the maximum fixed-fee that Walnut Creek can pay given this change? c. Explain any insights that the analyses in parts (a) and (b) revealed regarding the use of CVP for Walnut Creek's strategic decision making. 1. How would you describe the competitive strategy of Walnut Creek amphitheatre? Given the firm's strategy, what are the most important Key Performance Indicators (e.g., quantitative measures) for Walnut Creek to track and manage if it is to achieve its goal of continuous annual growth in operating income? 2. Complete the following two cost-volume-profit analyses for the show illustrated in Exhibit 2, the KFBS Allstars: How many tickets must Walnut Creek sell to break even? (Hint: don't ignore the possibility that the attendance of Comp ticket holders affects the concert's profitability). i. . Do you think that it is likely that Walnut Creek will break even? Briefly explain. ii. Given your estimated breakeven point in units, compute the Margin of Safety (MOS) in units. Briefly comment on the MOS result. How many tickets must Walnut Creek sell to earn $30,000 operating income after taxes, assuming a 40 percent tax rate? Is it reasonable to assume this level of operating income will be achieved? Briefly explain. b. What should be the average ticket price (for all ticket types combined-A through D) for the KFBS concert if the fixed-pay fee is $200,000 (rather than $160,635) and Walnut Creek expects to sell 7,000 tickets and wants to earn $30,000 operating income after 40 percent in taxes? After you estimate the average ticket price for all ticket types combined (which is $22.12 for the situation depicted in Exhibit 2), estimate the price for each type of seat (i.e., in Exhibit 2: A--$36.29, B--$22.22, C--$11.31, D--$4.92). [Hint: assume sales mix for A, B, C, and D seats remains the same as the mix in the Flash Report (Exhibit 2).] 3. 4. Negotiating the talent fee for the KFBS Allstars is an important strategic decision for Walnut Creek management. Perform the following two independent scenario analyses regarding different talent fee arrangements. Then comment briefly on what the results of your two scenario analyses suggest regarding whether Walnut Creek is better off negotiating a "fixed-pay" contract with performers or a "per capita" contract with performers: What is the maximum fixed fee that Walnut Creek can pay KFBS Allstars if Walnut Creek wants to earn $45,000 operating income after 40 percent tax and still expects the show to have an average ticket price of $22.12? Assume, including the same 25 percent comp tickets (i.e., 4:1 mix as before), the show is expected to be a sell-out. . b. Independent of (a), what is the maximum per capita fee (see p. 557 of the case for the reference of the 2.5 percent comp tickets at per capita shows) that Walnut Creek can pay the KFBS Allstars, whose concert is expected to be a sellout, if the Pavilion wants to earn $180,000 operating income after 40 percent tax from an average ticket price of $22.12 per ticket? ISSUES IN ACCOUNTING EDUCATION Vol. 19. No, 4 pp. 555-561 The Walnut Creek Amphitheatre: A Strategy and CVP Case Analysis Edward Blocher and Kung H. Chen ABSTRACT: The Walnut Creek Amphitheatre (Walnut Creek) case is intended for the undergraduate management accounting or cost accounting course and the M.B.A. management accounting course. It provides an excellent context in which to examine strategic issues in using cost volume profit (CVP) in a service business. Based on an actual entertainment pavilion, the case develops many factors unique to a service business and illustrates how pavilion management can use CVP analysis to determine which artists to attract and what kinds of contracts to have with these performers. The Pavilion has two types of customers (paying ticket holders and free ticket holders) and earns profits from three types of revenues (ticket revenues, concession revenues, and parking fees). The case requires you to identify the best strategy for different types of artists, conduct cost-volume-profit analyses, consider the strategic issues related to operating leverage and how this affects the choice of performer and contract, and assess pricing strategies. ne day in early November, Pam Berg, Manager of the Walnut Creek Amphitheatre (previously named the Time Warner Music Pavilion), was reviewing the operating results for the year just completed in preparation for the executive board meeting the following Friday. While the year ended in the black, she was disappointed that Walnut Creek failed to earn the budgeted profit goal. This was the second year since Ms. Berg assumed the manager's position at Walnut Creek. After the somewhat disappointing first year, she was determined to exceed the budgeted profit in the coming year. While not all events developed exactly as expected at the time of preparing the budget for the year, there were no major surprises during the year. Yet, the operating results are below the budgeted goal. In addition, Pam was frustrated by the lack of clear guidelines for contract negotiations with artists, for setting ticket prices, and in dealing with unexpected low ticket sales for certain concerts. THE WALNUT CREEK AMPHITHEATRE FOR LIVE ENTERTAINMENT The Walnut Creek Amphitheatre in Raleigh, North Carolina (walnutcreekamphitheatre.com an outdoor amphitheater that provides live concerts to the public from April through October each year, hosting as many as half a million patrons a year. The seven-month season usually hosts an average of 40 concerts, and 12 year-round staff plan and manage each season. SFX Entertainment Inc. (or LiveStyle) operates the pavilion. SFX is one of the largest diversified promoters, producers, and venue operators for live entertainment events in the United States. It has 71 venues either directly owned or operated under lease or exclusive booking arrangements in 29 of the top 50 U.S. markets, including 14 amphitheaters or pavilions in 9 of the top 10 markets. is 555 Walnut Creek wants to be the nightlife for the Triangle (Raleigh-Durham-Chapel Hill, NC) and eastern North Carolina, and one of the most beautiful, technologically advanced, and successful amphitheaters in the world. It features the most modern state-of-the-art acoustics and video of any facility of its kind. In the last few years, Walnut Creek staged shows by the Dave Matthews Band, Coldplay, Drake, Alan Jackson, Blink 182, Toby Keith, Santana, Lil Wayne, Tim McGraw, Aerosmith, James Taylor, Sting, Jimmy Buffett, and many other national, regional, and local artists. It also hosts major events, such as Lollapalooza, JazzFest and Mayhem Festival. The Pavilion claims, "There isn't a bad seat in the house. Whether you choose to spread a blanket on our gently sloping festival lawn or select a reserved seat in our pavilion seating area, you are guaranteed a great view of the action on the stage". Exhibit 1 shows the stage and seating of the amphitheater. History/Development The city of Raleigh and Pace Entertainment Company of Houston, Texas jointly built the Walnut Creek Amphitheatre in 1991. Pace Entertainment and Cellar Door Inc. of Raleigh, NC had the initial contract to manage the Pavilion. Hardee's Food Systems, Inc. of Rocky Mount, NC, the original sponsor of the amphitheater, paid an annual fee to carry its name and logo on all signs and ads regarding the amphitheater. On February 3, 1999, Walnut Creek became the title sponsor for the amphitheater. The demand for the outdoor facility came about because the rapidly growing city of Raleigh lacked a major entertainment complex. In the late 1980s Pace Entertainment and the city of Raleigh came to an agreement to build the facility. The city of Raleigh would own the land while Pace Entertainment would own the facility and assume sole operations of the facility; Cellar Door would do the booking for all the concerts. Pace Entertainment would pay income taxes on earnings from the use of the facility. In 1998, SFX Entertainment Inc. acquired Pace Entertainment Inc. The amphitheater facility and its employees became part of SFX Entertainment Inc. Also, in 1999 SFX Entertainment Inc. acquired Cellar Door Inc. and merged with Clear Channel Communications Inc., one of the largest owners of radio stations in the country. This move brought together both worlds of the entertainment business. While the company has diverse holdings, the philosophy of SFX is "One Company, One Mission." Many companies that are now owned by SFX were at one time bitter rivals in the concert promoting business. These companies now maintain good working relationships within SFX. A key goal for SFX is for the net operating income of each of its holdings, including Walnut Creek, to grow 5 percent each year. The Pavilion competes with PNC Arena (http://www.pnccenter.com) at North Carolina State University in Raleigh (NCSU), the Dean Smith Activities Center (http://www.goheels.com/ViewArticle.dbml?ATCLID-205720085) at The University of North Carolina in Chapel Hill, NC (UNC), and the Verizon Wireless Amphitheater in Charlotte, NC (http://www.pncmusicpav.com), among others. In contrast to the facilities at NCSU and UNC that offer only indoor events, the Pavilion offers outdoor as well as sheltered seating for its events. Marketing, Operations, and Accounting When the marketing department plans a promotion for an upcoming event, it coordinates with the sales department to see if there is a conflict in sponsorship. Marketing also coordinates with the operations department to effectively manage the activities on show days. Finally, the budget of each department (sales, marketing, and operations) is reviewed by the accounting department, which provides overall financial management of the project. Bringing Concerts to Reality A concert becomes reality in many steps. First, a group or performer with an interest in performing at Walnut Creek will discuss with Cellar Door, Inc. and Walnut Creek the possibility of performing at the amphitheatre, and look at the open dates. Upon reaching an agreement, Cellar Door, on behalf of Walnut Creek, signs a contract with the booking agent for the performer. A time is specified for gate openings, and once the gate is opened the show is underway. The job of the staff during a concert is to make sure every customer of Walnut Creek has a pleasant experience and that the mission of the company is clearly seen by everyone that "a concert ... it's better live." Clean Sweep Inc. of Raleigh handles the cleanup after a show. Key Business Issues Marketing has an important role in the success of the Walnut Creek amphitheatre, but marketing expenditures are carefully watched. For every show, the marketing budget is limited to $20,000. For many shows it is difficult to stay within the budget, since the Pavilion serves a five-market region consisting of Raleigh-Durham, Fayetteville, Wilmington, Greensboro, and the Carolina Coast. Most of the marketing budget is spent on advertising with radio, TV, and print media in the designated regions. Prior to developing advertising plans, the marketing staff analyzes ticket sales geographically over the five-market region. It is important to know the demographics of the five regions and compare them with the profile for each performer. The more Walnut Creek can know about the fans, the more they know where to spend the $20,000. SFX develops measures of performance and profitability for each advertising media, by region. This type of analysis is important to Walnut Creek because increased ticket sales, through effective advertising, not only affect ticket revenues, but also revenues from parking, merchandise, and concessions. It is also important because of the increased cost of advertising. The advertising rates in the Raleigh-Durham region are comparable to the rates in Washington, D.C. The rates are up 200 percent over the last five years, while the budgets per show are only up 15 percent over this time. The cost of the performing artist has also increased dramatically. The average fee for an artist is approximately $160,000. Some artists are paid on a fixed-fee basis, while others are paid on a per capita basis. Generally, the most popular artists seek a per capita contract because they are confident of a high level of attendance. In contrast, the artist paid a fixed-fee is guaranteed the same fee whether 100 or 20,000 people attend (the capacity of the amphitheatre is approximately 20,000 attendance). On average, the total number of paid tickets per fixed-fee concert is 7,000. The role of marketing and advertising is especially important for fixed-fee shows. One method Walnut Creek uses in addition to advertising is to distribute "comp" tickets (comp tickets are free tickets distributed throughout the community) to build interest in the Pavilion that will later be realized in paying customers. Comp customers also bring in revenue for parking, concessions, and merchandise sales. In a fixed-fee concert, the number of comp tickets is approximately 25 percent of the number of paying tickets, while a per capita show has no more than 2.5 percent. Because of the increasing cost of the performing artists, Walnut Creek tries to reduce nonartist costs. Nonartist costs at Walnut Creek include expenses for sales, marketing, parking, security, concessions, and merchandise. Since assuming the manager position, Pam has developed several avenues to reduce nonartist costs and/or increase revenues and profits, including reducing expenses, having the parking service pass out flyers for upcoming events, trading "comp" tickets for online spots in the radio industry, and giving local businesses tickets in exchange for advertising on their premises. Revenues, Costs, and Flash Report for the KFBS Allstars Concert Exhibit 2 is a mock flash report for an illustrative fixed-fee show, the KFBS Allstars. A flash report is a projection of costs and revenues for a scheduled concert. The guarantee/talent cost ($160,635) is the amount the KFBS Allstars are guaranteed for the show. Projected sales is the number of projected paying ticket holders, while the "drop count" is total attendance, including both paid and comp tickets. Setting ticket price is often done together with the performer, taking into consideration SFX's national and regional pricing policies, prices of comparable venues, and the Pavilion's desired profit for the concert. Pam uses the flash report to plan potential concerts and to evaluate the success of concerts already presented. The report shows the variety of revenues and costs for a concert, and the projected profit for the concert. The flash report projects total revenues including ticket sales, parking, food, and merchandise based on per capita (drop count) rates. Ticket sales are in four ticket categories: A seats and B seats are regular price tickets for the reserved and lawn seating sections respectively; C and D seats are promotional (discount) price tickets for reserved and lawn seating, respectively. Other revenues include per capita facility charges paid by the sponsoring corporation for naming rights (based on paid ticket holders) and a per capita service charge paid by the performer for food, transportation, and other services. Not included are the annual lease payments for VIP seats at $10,000 per year. Patrons to the VIP seats also have to pay the ticket price of A-level seats. Reserved and lawn seating areas are shown in Exhibit 1. The parking, food concession, and merchandise operations are outsourced to other service providers, so the direct costs for parking, merchandise and concessions are determined based on contracts with the service providers that include both a percentage (10 percent) of applicable revenues and a fixed fee. Operating expenses include an allocation of the total of fixed production and operations costs for the season, the advertising expenses for the KFBS Allstars event, and other variable expenses. These are then added to the direct costs for concessions, merchandise, parking, and insurance to determine total operating expenses. EXHIBIT 1 Walnut Creek Amphitheatre Pavilion Stage and Seating Walnut Creek can accommodate 20,000 fans with 7,000 reserved seats directly in front of the stage (covered seating in sections 1 through 9 and VIP seating) and another 13,000 on the spacious lawn. It has 78 theater-style VIP boxes that can accommodate 4, 6, or 8 people. In addition to positioning for prime viewing, patrons in VIP boxes also enjoy amenities such as wait staff service at their seats, personalized parking, and exclusive membership to the VIP Bar & Grill. Directly in front of sections 4, 5, 8, and 9 is seating with an elevated floor that provides excellent views of the stage for patrons with disabilities and additional seating for the hearing or visually impaired. Lawn Seating 3 Reserved, Covered STAGE Seating EXHIBIT 2 (continued) EXHIBIT 2 Other Direct Costs Flash Report for the KFBS Allstars Concert PARKING CONTRACT $4,448 ARTIST NAME The KFBS Allstars CONCESSION CONTRACT $43,356 $17,826 $226,265 ACTIVITY/EVENT NUMBER 1031001. EVENT MONTH MERCHANDISE CONTRACT EVENT DATE 7/31/20X4 TOTAL DIRECT COSTS Projected Sales (number of Seats) A Seats B Seats C Seats D Seats Per capita $21.86 2,778 PERCENT OF SALES 63.20% 2,845 TOTAL REVENUE (from above) TOTAL DIRECT COSTS (from above) $358,141 $226,265 $131,876 1,747 881 TOTAL Number of Seats 8,251 GROSS PROFIT Projected Ticket Price A Seats B Seats C Seats D Seats Operating Expenses $36.29 TOTAL PRODUCTION EXPENSE $15,506 $22.22 TOTAL OPERATIONS EXPENSE $14,991 $11.31 TOTAL OTHER VAR. EXPENSE $14,323 $4.92 $20,030 $64,850 PROJECTED NET AFTER TAX ADMISSIONS $182,479 TOTAL ADVERTISING EXPENSE AVG TIX PRICE NET OF TAX PER PAYING PATRON $22.12 TOTAL OPERATING EXPENSE TALENT % 88.03% Per capita S6.27 GUARANTEE TALENT COSTS $160,635 PERCENT OF SALES 18.1% NUMBER PERFORMANCES 1 OPERATING INCOME S67,026 DROP COUNT (inchudes comp tickets) Other Ticket-Related Revenue 10,349 Per capita $6.48 $24,010 $2.91 FACILITY CHARGE PERCENT OF SALES 18.7% Per capita Detail: Other Concert Variable Expense $16,172 $1.96 $222,673 $26.99 SERVICE CHARGE Per capita Insurance Expense per person $0.17 REVENUE FROM TICKETING COGS-Concession per person COGS-Merchandise Inventory per person COGS-parking per person Other Variable Concert Expense per person Per capita $0.35 ANCILLARY REVENUES $1.12 PARKING $19,767 $0.08 Per capita FOOD CONCESSIONS Per capita $1.91 $0.02 $79,273 TOTAL OTHER VARIABLE EXPENSE $14,323 $7.66 $36,428 $3.52 MERCHANDISE Per capita RENTALS $0.00 REVENUE FROM ANCILLARIES $135,468 Per capita $13.09 TOTAL REVENUE $358,141 Per capita $34.61 5. Walnut Creek management examined the results of the scenarios examined in requirement 4 and subsequently held additional discussions with Walnut Creek's marketing team. The biggest uncertainty for Walnut Creek concerns the number of paying ticket patrons for lesser known performers. As a result, Walnut Creek management believes that the two most likely contract structure scenarios it will face when negotiating contracts with lesser known performers (i.e., bands) will be as follows. The first structure is per-capita in nature (Alternative 1) and would pay the performer a fee of $20 per paid ticket holder. The second structure is fixed in nature (Alternative 2) and would pay the performer a flat fee of $250,000. a. Assuming the same other relevant information from the case, calculate the indifference point for these two fee contract structures. Be sure to SHOW YOUR CALCULATIONS. Briefly explain what this indifference point means. b. What profit is earned by Walnut Creek at this indifference point? Be sure to SHOW YOUR CALCULATIONS. Walnut Creek's marketing team estimates that it will be able to sell 10,000 tickets for the hot new band-The Don't Suck. Explain which contract structure Walnut Creek should pursue with The Don't Suck band negotiations and WHY this particular structure is best for Walnut Creek. . What role does CVP analysis and operating leverage play in contract negotiations with different types of performers (fixed-fee or per capita)? 6. 7. The results of CVP analyses are extremely useful for decision making. However, they also are highly dependent upon the assumptions used to generate the inputs into the CVP analyses. Preferably using an Excel spreadsheet (although you may simply use paper instead if you so desire), rerun the following two CVP analyses but take into account the sensitivity changes (i.e., changes in key assumptions) described below: The break even analysis for requirement 2a: Assume now that the number of comp tickets in a fixed-fee concert is only 10 percent (rather than 25 percent as on p. 557 of the case). What is the break even point in units given this change? . b. The maximum fixed-fee that Walnut Creek can pay in requirement 4a: Assume now that after the KFBS Allstar show is arranged (i.e., can't be moved or canceled), another unexpected big event becomes scheduled for the same evening as the KFBS Allstar show (e.g., Presidential debate, the Oscars, Cubs in another World Series Game 7, etc.). As a result, assume that the KFBS Allstar show draws only 3,000 paying ticket holders. What is the maximum fixed-fee that Walnut Creek can pay given this change? c. Explain any insights that the analyses in parts (a) and (b) revealed regarding the use of CVP for Walnut Creek's strategic decision making. 1. How would you describe the competitive strategy of Walnut Creek amphitheatre? Given the firm's strategy, what are the most important Key Performance Indicators (e.g., quantitative measures) for Walnut Creek to track and manage if it is to achieve its goal of continuous annual growth in operating income? 2. Complete the following two cost-volume-profit analyses for the show illustrated in Exhibit 2, the KFBS Allstars: How many tickets must Walnut Creek sell to break even? (Hint: don't ignore the possibility that the attendance of Comp ticket holders affects the concert's profitability). i. . Do you think that it is likely that Walnut Creek will break even? Briefly explain. ii. Given your estimated breakeven point in units, compute the Margin of Safety (MOS) in units. Briefly comment on the MOS result. How many tickets must Walnut Creek sell to earn $30,000 operating income after taxes, assuming a 40 percent tax rate? Is it reasonable to assume this level of operating income will be achieved? Briefly explain. b. What should be the average ticket price (for all ticket types combined-A through D) for the KFBS concert if the fixed-pay fee is $200,000 (rather than $160,635) and Walnut Creek expects to sell 7,000 tickets and wants to earn $30,000 operating income after 40 percent in taxes? After you estimate the average ticket price for all ticket types combined (which is $22.12 for the situation depicted in Exhibit 2), estimate the price for each type of seat (i.e., in Exhibit 2: A--$36.29, B--$22.22, C--$11.31, D--$4.92). [Hint: assume sales mix for A, B, C, and D seats remains the same as the mix in the Flash Report (Exhibit 2).] 3. 4. Negotiating the talent fee for the KFBS Allstars is an important strategic decision for Walnut Creek management. Perform the following two independent scenario analyses regarding different talent fee arrangements. Then comment briefly on what the results of your two scenario analyses suggest regarding whether Walnut Creek is better off negotiating a "fixed-pay" contract with performers or a "per capita" contract with performers: What is the maximum fixed fee that Walnut Creek can pay KFBS Allstars if Walnut Creek wants to earn $45,000 operating income after 40 percent tax and still expects the show to have an average ticket price of $22.12? Assume, including the same 25 percent comp tickets (i.e., 4:1 mix as before), the show is expected to be a sell-out. . b. Independent of (a), what is the maximum per capita fee (see p. 557 of the case for the reference of the 2.5 percent comp tickets at per capita shows) that Walnut Creek can pay the KFBS Allstars, whose concert is expected to be a sellout, if the Pavilion wants to earn $180,000 operating income after 40 percent tax from an average ticket price of $22.12 per ticket? ISSUES IN ACCOUNTING EDUCATION Vol. 19. No, 4 pp. 555-561 The Walnut Creek Amphitheatre: A Strategy and CVP Case Analysis Edward Blocher and Kung H. Chen ABSTRACT: The Walnut Creek Amphitheatre (Walnut Creek) case is intended for the undergraduate management accounting or cost accounting course and the M.B.A. management accounting course. It provides an excellent context in which to examine strategic issues in using cost volume profit (CVP) in a service business. Based on an actual entertainment pavilion, the case develops many factors unique to a service business and illustrates how pavilion management can use CVP analysis to determine which artists to attract and what kinds of contracts to have with these performers. The Pavilion has two types of customers (paying ticket holders and free ticket holders) and earns profits from three types of revenues (ticket revenues, concession revenues, and parking fees). The case requires you to identify the best strategy for different types of artists, conduct cost-volume-profit analyses, consider the strategic issues related to operating leverage and how this affects the choice of performer and contract, and assess pricing strategies. ne day in early November, Pam Berg, Manager of the Walnut Creek Amphitheatre (previously named the Time Warner Music Pavilion), was reviewing the operating results for the year just completed in preparation for the executive board meeting the following Friday. While the year ended in the black, she was disappointed that Walnut Creek failed to earn the budgeted profit goal. This was the second year since Ms. Berg assumed the manager's position at Walnut Creek. After the somewhat disappointing first year, she was determined to exceed the budgeted profit in the coming year. While not all events developed exactly as expected at the time of preparing the budget for the year, there were no major surprises during the year. Yet, the operating results are below the budgeted goal. In addition, Pam was frustrated by the lack of clear guidelines for contract negotiations with artists, for setting ticket prices, and in dealing with unexpected low ticket sales for certain concerts. THE WALNUT CREEK AMPHITHEATRE FOR LIVE ENTERTAINMENT The Walnut Creek Amphitheatre in Raleigh, North Carolina (walnutcreekamphitheatre.com an outdoor amphitheater that provides live concerts to the public from April through October each year, hosting as many as half a million patrons a year. The seven-month season usually hosts an average of 40 concerts, and 12 year-round staff plan and manage each season. SFX Entertainment Inc. (or LiveStyle) operates the pavilion. SFX is one of the largest diversified promoters, producers, and venue operators for live entertainment events in the United States. It has 71 venues either directly owned or operated under lease or exclusive booking arrangements in 29 of the top 50 U.S. markets, including 14 amphitheaters or pavilions in 9 of the top 10 markets. is 555 Walnut Creek wants to be the nightlife for the Triangle (Raleigh-Durham-Chapel Hill, NC) and eastern North Carolina, and one of the most beautiful, technologically advanced, and successful amphitheaters in the world. It features the most modern state-of-the-art acoustics and video of any facility of its kind. In the last few years, Walnut Creek staged shows by the Dave Matthews Band, Coldplay, Drake, Alan Jackson, Blink 182, Toby Keith, Santana, Lil Wayne, Tim McGraw, Aerosmith, James Taylor, Sting, Jimmy Buffett, and many other national, regional, and local artists. It also hosts major events, such as Lollapalooza, JazzFest and Mayhem Festival. The Pavilion claims, "There isn't a bad seat in the house. Whether you choose to spread a blanket on our gently sloping festival lawn or select a reserved seat in our pavilion seating area, you are guaranteed a great view of the action on the stage". Exhibit 1 shows the stage and seating of the amphitheater. History/Development The city of Raleigh and Pace Entertainment Company of Houston, Texas jointly built the Walnut Creek Amphitheatre in 1991. Pace Entertainment and Cellar Door Inc. of Raleigh, NC had the initial contract to manage the Pavilion. Hardee's Food Systems, Inc. of Rocky Mount, NC, the original sponsor of the amphitheater, paid an annual fee to carry its name and logo on all signs and ads regarding the amphitheater. On February 3, 1999, Walnut Creek became the title sponsor for the amphitheater. The demand for the outdoor facility came about because the rapidly growing city of Raleigh lacked a major entertainment complex. In the late 1980s Pace Entertainment and the city of Raleigh came to an agreement to build the facility. The city of Raleigh would own the land while Pace Entertainment would own the facility and assume sole operations of the facility; Cellar Door would do the booking for all the concerts. Pace Entertainment would pay income taxes on earnings from the use of the facility. In 1998, SFX Entertainment Inc. acquired Pace Entertainment Inc. The amphitheater facility and its employees became part of SFX Entertainment Inc. Also, in 1999 SFX Entertainment Inc. acquired Cellar Door Inc. and merged with Clear Channel Communications Inc., one of the largest owners of radio stations in the country. This move brought together both worlds of the entertainment business. While the company has diverse holdings, the philosophy of SFX is "One Company, One Mission." Many companies that are now owned by SFX were at one time bitter rivals in the concert promoting business. These companies now maintain good working relationships within SFX. A key goal for SFX is for the net operating income of each of its holdings, including Walnut Creek, to grow 5 percent each year. The Pavilion competes with PNC Arena (http://www.pnccenter.com) at North Carolina State University in Raleigh (NCSU), the Dean Smith Activities Center (http://www.goheels.com/ViewArticle.dbml?ATCLID-205720085) at The University of North Carolina in Chapel Hill, NC (UNC), and the Verizon Wireless Amphitheater in Charlotte, NC (http://www.pncmusicpav.com), among others. In contrast to the facilities at NCSU and UNC that offer only indoor events, the Pavilion offers outdoor as well as sheltered seating for its events. Marketing, Operations, and Accounting When the marketing department plans a promotion for an upcoming event, it coordinates with the sales department to see if there is a conflict in sponsorship. Marketing also coordinates with the operations department to effectively manage the activities on show days. Finally, the budget of each department (sales, marketing, and operations) is reviewed by the accounting department, which provides overall financial management of the project. Bringing Concerts to Reality A concert becomes reality in many steps. First, a group or performer with an interest in performing at Walnut Creek will discuss with Cellar Door, Inc. and Walnut Creek the possibility of performing at the amphitheatre, and look at the open dates. Upon reaching an agreement, Cellar Door, on behalf of Walnut Creek, signs a contract with the booking agent for the performer. A time is specified for gate openings, and once the gate is opened the show is underway. The job of the staff during a concert is to make sure every customer of Walnut Creek has a pleasant experience and that the mission of the company is clearly seen by everyone that "a concert ... it's better live." Clean Sweep Inc. of Raleigh handles the cleanup after a show. Key Business Issues Marketing has an important role in the success of the Walnut Creek amphitheatre, but marketing expenditures are carefully watched. For every show, the marketing budget is limited to $20,000. For many shows it is difficult to stay within the budget, since the Pavilion serves a five-market region consisting of Raleigh-Durham, Fayetteville, Wilmington, Greensboro, and the Carolina Coast. Most of the marketing budget is spent on advertising with radio, TV, and print media in the designated regions. Prior to developing advertising plans, the marketing staff analyzes ticket sales geographically over the five-market region. It is important to know the demographics of the five regions and compare them with the profile for each performer. The more Walnut Creek can know about the fans, the more they know where to spend the $20,000. SFX develops measures of performance and profitability for each advertising media, by region. This type of analysis is important to Walnut Creek because increased ticket sales, through effective advertising, not only affect ticket revenues, but also revenues from parking, merchandise, and concessions. It is also important because of the increased cost of advertising. The advertising rates in the Raleigh-Durham region are comparable to the rates in Washington, D.C. The rates are up 200 percent over the last five years, while the budgets per show are only up 15 percent over this time. The cost of the performing artist has also increased dramatically. The average fee for an artist is approximately $160,000. Some artists are paid on a fixed-fee basis, while others are paid on a per capita basis. Generally, the most popular artists seek a per capita contract because they are confident of a high level of attendance. In contrast, the artist paid a fixed-fee is guaranteed the same fee whether 100 or 20,000 people attend (the capacity of the amphitheatre is approximately 20,000 attendance). On average, the total number of paid tickets per fixed-fee concert is 7,000. The role of marketing and advertising is especially important for fixed-fee shows. One method Walnut Creek uses in addition to advertising is to distribute "comp" tickets (comp tickets are free tickets distributed throughout the community) to build interest in the Pavilion that will later be realized in paying customers. Comp customers also bring in revenue for parking, concessions, and merchandise sales. In a fixed-fee concert, the number of comp tickets is approximately 25 percent of the number of paying tickets, while a per capita show has no more than 2.5 percent. Because of the increasing cost of the performing artists, Walnut Creek tries to reduce nonartist costs. Nonartist costs at Walnut Creek include expenses for sales, marketing, parking, security, concessions, and merchandise. Since assuming the manager position, Pam has developed several avenues to reduce nonartist costs and/or increase revenues and profits, including reducing expenses, having the parking service pass out flyers for upcoming events, trading "comp" tickets for online spots in the radio industry, and giving local businesses tickets in exchange for advertising on their premises. Revenues, Costs, and Flash Report for the KFBS Allstars Concert Exhibit 2 is a mock flash report for an illustrative fixed-fee show, the KFBS Allstars. A flash report is a projection of costs and revenues for a scheduled concert. The guarantee/talent cost ($160,635) is the amount the KFBS Allstars are guaranteed for the show. Projected sales is the number of projected paying ticket holders, while the "drop count" is total attendance, including both paid and comp tickets. Setting ticket price is often done together with the performer, taking into consideration SFX's national and regional pricing policies, prices of comparable venues, and the Pavilion's desired profit for the concert. Pam uses the flash report to plan potential concerts and to evaluate the success of concerts already presented. The report shows the variety of revenues and costs for a concert, and the projected profit for the concert. The flash report projects total revenues including ticket sales, parking, food, and merchandise based on per capita (drop count) rates. Ticket sales are in four ticket categories: A seats and B seats are regular price tickets for the reserved and lawn seating sections respectively; C and D seats are promotional (discount) price tickets for reserved and lawn seating, respectively. Other revenues include per capita facility charges paid by the sponsoring corporation for naming rights (based on paid ticket holders) and a per capita service charge paid by the performer for food, transportation, and other services. Not included are the annual lease payments for VIP seats at $10,000 per year. Patrons to the VIP seats also have to pay the ticket price of A-level seats. Reserved and lawn seating areas are shown in Exhibit 1. The parking, food concession, and merchandise operations are outsourced to other service providers, so the direct costs for parking, merchandise and concessions are determined based on contracts with the service providers that include both a percentage (10 percent) of applicable revenues and a fixed fee. Operating expenses include an allocation of the total of fixed production and operations costs for the season, the advertising expenses for the KFBS Allstars event, and other variable expenses. These are then added to the direct costs for concessions, merchandise, parking, and insurance to determine total operating expenses. EXHIBIT 1 Walnut Creek Amphitheatre Pavilion Stage and Seating Walnut Creek can accommodate 20,000 fans with 7,000 reserved seats directly in front of the stage (covered seating in sections 1 through 9 and VIP seating) and another 13,000 on the spacious lawn. It has 78 theater-style VIP boxes that can accommodate 4, 6, or 8 people. In addition to positioning for prime viewing, patrons in VIP boxes also enjoy amenities such as wait staff service at their seats, personalized parking, and exclusive membership to the VIP Bar & Grill. Directly in front of sections 4, 5, 8, and 9 is seating with an elevated floor that provides excellent views of the stage for patrons with disabilities and additional seating for the hearing or visually impaired. Lawn Seating 3 Reserved, Covered STAGE Seating EXHIBIT 2 (continued) EXHIBIT 2 Other Direct Costs Flash Report for the KFBS Allstars Concert PARKING CONTRACT $4,448 ARTIST NAME The KFBS Allstars CONCESSION CONTRACT $43,356 $17,826 $226,265 ACTIVITY/EVENT NUMBER 1031001. EVENT MONTH MERCHANDISE CONTRACT EVENT DATE 7/31/20X4 TOTAL DIRECT COSTS Projected Sales (number of Seats) A Seats B Seats C Seats D Seats Per capita $21.86 2,778 PERCENT OF SALES 63.20% 2,845 TOTAL REVENUE (from above) TOTAL DIRECT COSTS (from above) $358,141 $226,265 $131,876 1,747 881 TOTAL Number of Seats 8,251 GROSS PROFIT Projected Ticket Price A Seats B Seats C Seats D Seats Operating Expenses $36.29 TOTAL PRODUCTION EXPENSE $15,506 $22.22 TOTAL OPERATIONS EXPENSE $14,991 $11.31 TOTAL OTHER VAR. EXPENSE $14,323 $4.92 $20,030 $64,850 PROJECTED NET AFTER TAX ADMISSIONS $182,479 TOTAL ADVERTISING EXPENSE AVG TIX PRICE NET OF TAX PER PAYING PATRON $22.12 TOTAL OPERATING EXPENSE TALENT % 88.03% Per capita S6.27 GUARANTEE TALENT COSTS $160,635 PERCENT OF SALES 18.1% NUMBER PERFORMANCES 1 OPERATING INCOME S67,026 DROP COUNT (inchudes comp tickets) Other Ticket-Related Revenue 10,349 Per capita $6.48 $24,010 $2.91 FACILITY CHARGE PERCENT OF SALES 18.7% Per capita Detail: Other Concert Variable Expense $16,172 $1.96 $222,673 $26.99 SERVICE CHARGE Per capita Insurance Expense per person $0.17 REVENUE FROM TICKETING COGS-Concession per person COGS-Merchandise Inventory per person COGS-parking per person Other Variable Concert Expense per person Per capita $0.35 ANCILLARY REVENUES $1.12 PARKING $19,767 $0.08 Per capita FOOD CONCESSIONS Per capita $1.91 $0.02 $79,273 TOTAL OTHER VARIABLE EXPENSE $14,323 $7.66 $36,428 $3.52 MERCHANDISE Per capita RENTALS $0.00 REVENUE FROM ANCILLARIES $135,468 Per capita $13.09 TOTAL REVENUE $358,141 Per capita $34.61 5. Walnut Creek management examined the results of the scenarios examined in requirement 4 and subsequently held additional discussions with Walnut Creek's marketing team. The biggest uncertainty for Walnut Creek concerns the number of paying ticket patrons for lesser known performers. As a result, Walnut Creek management believes that the two most likely contract structure scenarios it will face when negotiating contracts with lesser known performers (i.e., bands) will be as follows. The first structure is per-capita in nature (Alternative 1) and would pay the performer a fee of $20 per paid ticket holder. The second structure is fixed in nature (Alternative 2) and would pay the performer a flat fee of $250,000. a. Assuming the same other relevant information from the case, calculate the indifference point for these two fee contract structures. Be sure to SHOW YOUR CALCULATIONS. Briefly explain what this indifference point means. b. What profit is earned by Walnut Creek at this indifference point? Be sure to SHOW YOUR CALCULATIONS. Walnut Creek's marketing team estimates that it will be able to sell 10,000 tickets for the hot new band-The Don't Suck. Explain which contract structure Walnut Creek should pursue with The Don't Suck band negotiations and WHY this particular structure is best for Walnut Creek. . What role does CVP analysis and operating leverage play in contract negotiations with different types of performers (fixed-fee or per capita)? 6. 7. The results of CVP analyses are extremely useful for decision making. However, they also are highly dependent upon the assumptions used to generate the inputs into the CVP analyses. Preferably using an Excel spreadsheet (although you may simply use paper instead if you so desire), rerun the following two CVP analyses but take into account the sensitivity changes (i.e., changes in key assumptions) described below: The break even analysis for requirement 2a: Assume now that the number of comp tickets in a fixed-fee concert is only 10 percent (rather than 25 percent as on p. 557 of the case). What is the break even point in units given this change? . b. The maximum fixed-fee that Walnut Creek can pay in requirement 4a: Assume now that after the KFBS Allstar show is arranged (i.e., can't be moved or canceled), another unexpected big event becomes scheduled for the same evening as the KFBS Allstar show (e.g., Presidential debate, the Oscars, Cubs in another World Series Game 7, etc.). As a result, assume that the KFBS Allstar show draws only 3,000 paying ticket holders. What is the maximum fixed-fee that Walnut Creek can pay given this change? c. Explain any insights that the analyses in parts (a) and (b) revealed regarding the use of CVP for Walnut Creek's strategic decision making.