ACCTGIB Chapter 19 American Cinema Theatre Sheila and La Marr Davis, decided to start their own business which would bring movies of all genres to their local community. Together they have started the American Cinema Theatre, or ACT. La Mort is the movie guy". having his degree in film studies and some script writing experience. He is responsible for determining and securing the films that ACT screens. Sheila manages the front and back office; seling the movie tickets, paying the employees, and running ads for the theatre. In its first year of operations the company sold 80.000 tickets and had the below sales and cost figures. Sales $800.000 Variable Costs 600.000 Fixed Costs 100.000 Income Tax Rate 32% The husband and wife team know that another chalenging and competitive year lies ahead of them. Now entering their second year of operations, they are considering an alternative and have hired your consulting group, known for its inventive business and accounting consulting work, to help them make some important business decisions. met Blo Bu 1 ACCTGIB Chapter 19 American Cinema Theatre Alternative - Discount Theatre Facing stiff competition from the movie megaplexes, American Cinema Theatre (ACT) is considering becoming a discount theatre. This means ACT would show second-run movies, these are films that have previously been shown at first- run theatres. ACT would have to charge a lower ticket price for second-run movies but La Man and Sheila believe that the lower ficket price will increase their customer base - allowing teenagers, senior citizens, and large families to attend their theatre. Also, acquiring second-run movies is considerably less expensive then acquiring first-run movies which will decrease ACT's variable costs. The financial information is presented below, assuming 80,000 fickets are sold using the regular scenario and 100,000 tickets are sold under the discount theatre scenario due to the greater number of customers. Regular Discount Tickets 80,000 100.000 Sales $800.000 $700.000 Variable Costs 600.000 420.000 Fixed Costs 100,000 140,000 Income Tax Rate 32% 32% Required: 1.) Prepare a contribution margin income statement for both scenarios. The statement should include both total dollars and per unit costs. 2.) Compute the company's contribution margin ratio under both scenarios. 3.) Compute the break-even point in sales dollars under each scenario. How many tickets will need to be sold under each situation to break-even? 4.) If the company wishes each scenario, regular theatre and discount theatre, to generate target profit of $250,000, what is the amount of sales that needs to be generated? How many tickets will then need to be sold? Prepare a contribution margin statement for this step and verify that your target profit equals $250.000 for both the regular and discount theatre. 5.) Assume that the company expects ticket sales to decline by 20% next year. There will be no change in ticket price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two theatre types. 2
