Cost Volume Profit Case You are a junior accountant working for AMC theaters The top management team at AMC theaters has been discussing ways to increase revenue for the movie theater chain Management has decided to pursue the possibility of introducing a monthly product called the A listers Program for (extra revenue) Signing up for the A listers program will cost $19 95 per month (with a minimum 3 month commitment) and will allow the customer to watch up to 3 movies per week at no additional cost An A lister member can watch any movies including premium movies (ones on bigger screens like IMAX) at no additional cost Senior management at AMC believes adding the A lister program will increase profits because it will increase the total amount of money customers will spend with AMC at minimal additional cost When introducing the A listers program, Margo, one of AMCs vice presidents described the benefits of the new program as follows The new A listers program will increase overall profitability in several ways First, a customer who signs up to be a A list member will no longer be spending their movie watching budget at competing theater chains Once they are an A list member since they can watch up to 3 movies a week at AMC theaters they will be much more likely to be a loyal customer of AMC Second, because the A listers program presents such a great value to our customers, this should increase the amount of customers who are willing to sign up to be an A list member who otherwise would only have watched an average of 1 movie or less a month at one of our theaters Finally, because we have a largely fixed cost structure, the additional costs of introducing this new program should be minimal You have been tasked with projecting the profitability of the A listers program for AMC You have estimated the following costs to be required as a result of the new A listers program Programming for initial setup of A list website and app $18,000,000 (AMC will depreciate this cost over 3 years using straight line depreciation) Recurring monthly costs to maintain A list website and app $110,000 Pay for one additional employee to check tickets provide customer service help at each theater because of increased demand from A list members The cost for each additional employee to AMC is $22 per hour Assume AMC has 600 theaters and operates each theater for an average of 12 hours per day 365 days a year This is considered a fixed cost Lost revenue from A list members who would otherwise spend more than $19 95 per month on movies tickets and from non A list members who are unable to watch a movie because of increased demand from A list members Because there is some uncertainty about how to estimate this, you have decided to use three separate estimates for lost revenue per A list subscriber per month $5, $10 and $15 Required Case Questions (5 parts A E) Using the information provided above calculate the breakeven point for the three separate estimates for average lost revenue per month for each A list subscriber Assume AMC requires a 14 rate of return on any investment after taxes Assume AMC is subject to an average tax rate of 25 If there are 725,000 A list subscribers will the A list program achieve the desired rate of return on their A list program for each of the possible lost revenue amounts per A list subscriber listed in part A Assume that AMC decides to offer 2 different levels of the A listers program, the standard for $19 95 a month that allows the user to watch 3 movies a week and a deluxe version for $39 95 a month that allows unlimited movie viewing Assume a mix of 75 standard A list subscribers and 25 deluxe A list subscribers if these two products are both offered Also assume the average lost revenue per subscriber is $10 per month for the standard A list subscriber and $20 per month for the deluxe A list subscriber (assume no other costs change) What is the new break even point using these assumptions Would instituting the new A list program be likely to change the operating leverage at AMC theaters What factors would determine the impact of instituting the new A list program on the overall operating leverage of AMC Use your own estimates of increases in revenue Describe at least one factor that would be likely to affect the profitability of the A listers program that was not included or discussed in the case Yearly figured are required

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Cost Volume-Profit Case You are a junior accountant working for AMC theaters. The top management team at AMC theaters has been discussing ways to increase

Cost Volume-Profit Case

You are a junior accountant working for AMC theaters. The top management team at AMC theaters has been discussing ways to increase revenue for the movie theater chain. Management has decided to pursue the possibility of introducing a monthly product called the A-listers Program for (extra revenue). Signing up for the A-listers program will cost $19.95 per month (with a minimum 3-month commitment) and will allow the customer to watch up to 3 movies per week at no additional cost. An A-lister member can watch any movies including premium movies (ones on bigger screens like IMAX) at no additional cost. Senior management at AMC believes adding the A-lister program will increase profits because it will increase the total amount of money customers will spend with AMC at minimal additional cost. When introducing the A-listers program, Margo, one of AMCs vice presidents described the benefits of the new program as follows: The new A-listers program will increase overall profitability in several ways. First, a customer who signs up to be a A-list member will no longer be spending their movie watching budget at competing theater chains. Once they are an A-list member since they can watch up to 3 movies a week at AMC theaters they will be much more likely to be a loyal customer of AMC. Second, because the A-listers program presents such a great value to our customers, this should increase the amount of customers who are willing to sign up to be an A-list member who otherwise would only have watched an average of 1 movie or less a month at one of our theaters. Finally, because we have a largely fixed cost structure, the additional costs of introducing this new program should be minimal.

You have been tasked with projecting the profitability of the A-listers program for AMC. You have estimated the following costs to be required as a result of the new A-listers program:

Programming for initial setup of A-list website and app: $18,000,000 (AMC will depreciate this cost over 3 years using straight line depreciation)
Recurring monthly costs to maintain A-list website and app: $110,000
Pay for one additional employee to check tickets/ provide customer service help at each theater because of increased demand from A-list members: The cost for each additional employee to AMC is $22 per hour. Assume AMC has 600 theaters and operates each theater for an average of 12 hours per day 365 days a year. This is considered a fixed cost.
Lost revenue from A-list members who would otherwise spend more than $19.95 per month on movies tickets and from non A-list members who are unable to watch a movie because of increased demand from A-list members. Because there is some uncertainty about how to estimate this, you have decided to use three separate estimates for lost revenue per A-list subscriber per month: $5, $10 and $15.

Required Case Questions (5 parts A-E)

Using the information provided above calculate the breakeven point for the three separate estimates for average lost revenue per month for each A-list subscriber.

Assume AMC requires a 14% rate of return on any investment after taxes. Assume AMC is subject to an average tax rate of 25%. If there are 725,000 A-list subscribers will the A-list program achieve the desired rate of return on their A-list program for each of the possible lost revenue amounts per A-list subscriber listed in part A?

Assume that AMC decides to offer 2 different levels of the A-listers program, the standard for $19.95 a month that allows the user to watch 3 movies a week and a deluxe version for $39.95 a month that allows unlimited movie viewing. Assume a mix of 75% standard A-list subscribers and 25% deluxe A-list subscribers if these two products are both offered. Also assume the average lost revenue per subscriber is $10 per month for the standard A-list subscriber and $20 per month for the deluxe A-list subscriber (assume no other costs change). What is the new break-even point using these assumptions?

Would instituting the new A-list program be likely to change the operating leverage at AMC theaters? What factors would determine the impact of instituting the new A-list program on the overall operating leverage of AMC? Use your own estimates of increases in revenue.

Describe at least one factor that would be likely to affect the profitability of the A-listers program that was not included or discussed in the case.
Yearly figured are required!