CVP Analysis

Chapter 5

Gryffindor House is a small theater located in Pittsburgh Pennsylvania. The theater contains 1,500 seats. You have recently been hired to manage the theater. Profits at the theater have been all over the place and the board would like you to make some recommendations about pricing of tickets. The board would like to make a profit of $50,000 per run.

There are two shows where some decisions should be made. The first show is Goblets of Fire and the second show is Flight of the Hippogriff.

Below is some information for Goblets of Fire

Ticket price $25

Variable costs $15

Fixed costs 2,000

It is expected that you will have 3 shows and that each show will be about 75% full. For the full run of the show (all 3 shows) For each question below use the information given to answer the question. Show all work

1. What is the Net Operating Income for this show?
2. What is the Breakeven point for this show in units(seats)? Compare this to the expected number of units sold. Explain how this impacts the theaters profits
3. Will Goblets of Fire meet the target profit set by the board?
4. What is the Goblets of Fires margin of Safety?
5. You wonder if increasing the number of shows and adding a Thursday night show would increase profits. Fixed costs would increase by $500. You expect that you would sell about 60% of seats on a Thursday night. Should you add Thursday night? Explain and be sure to use your calculations to support your argument.

Below is some information for Flight of the Hippogriff

Ticket price $25

Variable costs $10

Fixed costs 4,000

It is expected that you will have 4 shows and that each show will be about 70% full. For the full run of the show (all 4 shows) For each question below use the information given to answer the question. Show all work

6. What is the Net Operating Income for this show?
7. What is the Breakeven point for this show in units(seats)? Compare this to the expected number of units sold. Explain how this impacts the theaters profits
8. Will Flight of the Hippogriff meet the target profit set by the board?
9. What is the margin of Safety?
10. The performers in Flight of Hippogriff like to have a very full audience. They discuss dropping ticket prices to $20. They think the shows will be 80% full with a price decrease. Do they have a good idea? Explain why or why. Support your position with calculations.
11. The board is thinking about spending an additional $1,500 on advertising. They estimate an increase of 2,000 seats sold. Do they have a good idea? Explain why or why. Support your position with calculations.

12. Calculate the degree of operating leverage for both shows.
13. Compare and contrast the price structure for the two shows? Detail the advantages and disadvantages. Be sure to use vocabulary from chapter 5.
14. Community theater serves a greater purpose than mere profits. The board would like to raise prices of all tickets to $30. What are your thoughts on the price increase? What are the advantages or disadvantages? Given the information above would you recommend a price increase? Why or why not.