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FORREST GUMP CASE STUDY ForrestGumpwasoneofthebiggestmoviehitsof1994.Themoviesfortunescontinuedtoclimbin1995,asittookhomeOscarsinsixofthe13categoriesinwhichitwasnominated,includingbestpicture,bestdirectorandbestactor.Oneanalysthasestimatedthatthefilmcouldgeneratecashflowasmuchas$350millionforViacom,Inc.,ParamountPicturesparentcompany.Suchsuccesshasinsuredthefilmaplaceamongthetopgrossingfilmsofalltimes.Thisisquiteanaccomplishmentforamoviethattooknineyearstomakeittothebigscreenandwhosescriptwasnotconsideredmateriallikelytoguaranteearunawayhitmovie.ButwasForrestGumpamoneymakerforParamountin1994?Filmsaretypicallydistributedtotheatresunderanagreementthatsplitsthegrossboxofficereceiptsapproximately50/50betweenthetheatreandthemoviestudio.Undersuchanagreement,paramounthadreceived$191millioningrossboxofficereceiptsfromtheatresasofDecember31,1994.Paramountreportsthatthefilmcosts$112milliontoproduce,includingapproximately$15.3millioneachpaidtostarTomHanksanddirectorRobertZemeckis,andproductionoverheadof$14.6million.Thisproductionoverheadischargedtothemovieatarateequalto15%ofotherproductioncosts.Notincludedinthe$112millionproductioncostswerethefollowingotherexpensesassociatedwiththefilm.Promotionexpensesincurredtoadvertise,premiere,screen,transportandstorethefilmtotalled$67millionattheendof1994.Anadditional$6.7millionadvertisingoverheadcharge(equalto10%ofthe$67millionpromotionexpenses)waschargedtothefilmbyParamount.Thesechargesrepresentthefilmsallocationofthestudioscostofmaintaininganin-houseadvertisingdepartment.Paramountalsochargedthefilmadistributionfeeof32%ofitsshareofgrossboxofficereceipts.ThisfeeisthefilmsallocationofthecostsincurredbyParamounttomaintainitsstudio-widedistributionservice.Finally,$6millionininterestsonthe$112millioninproductioncostswerechargedtothefilmbyParamount. 1. WasForrestGumpanaccountinghitintermsofnetincome,ascomputedbyParamount? 2. Intheiroriginalcontracts,actorTomHanksanddirectorRobertZemeckisweretoreceive$7millionand$5million,respectively,fortheirworkonForrestGump.However,afterthestudioaskedtheproducersforbudgetcuts,bothHanksandZemeckisagreedtoforegotheirstandardfeeforapercentageofthefilmsgrossboxofficereceipts.Sourcesestimatethatthenewagreementguaranteedeachofthetwo8%ofthestudiosshareofgrossboxofficereceiptsfromthefilm.Usingtheinformationavailableaboutthecostsofmakingthefilm,didForrestGumphaveapositivecontributionmargin?Assumethatallcostsnotspecificallyidentifiedasvariablearefixed. 3. IfHanksandZemeckishaddemandedtheiroriginalfeesupfrontinsteadoftakingapercentageofgrossboxofficereceipts,wouldForrestGumphavemademoneyin1994? 4. Otherindividualsassociatedwiththefilmsignedcontractsbasedonapercentageofnetprofitsratherthangrossboxofficereceipts,netprofitsbeingthefilmsprofitafterrecoupingofallthestudiosexpenses.Forexample,WinstonGroom,whowrotethenovelonwhichthemoviewasbased,received$350,000plus3%ofthefilmsnetprofits.EricRoth,thescreenwriter,signedasimilarcontractwithafixedfeeplus5%ofthefilmsnetprofits.Basedonyourcalculationsabove,howmuchdidthesetwoindividualsreceivefromtheirshareofthefilmsnetprofits? 5. HowmuchingrossboxofficereceiptswillthestudiohavetoreceivefromtheatersbeforeGroomandRothreceiveanymoneyundertheirnetprofitparticipationcontract?(Again,assumethatallcostsnotspecificallyidentifiedasvariablearefixed.) 6. Basedonwhatyounowknowaboutcontractsinthemovieindustry,whichtypeofcontractwouldastudiopreferactors,directorsandothersassociatedwithafilmtohave?Why?Whichtypeofcontractwouldtheactors,directors,andothersprefertohave?Why?
- FORREST GUMP CASE STUDY
- ForrestGumpwasoneofthebiggestmoviehitsof1994.Themoviesfortunescontinuedtoclimbin1995,asittookhomeOscarsinsixofthe13categoriesinwhichitwasnominated,includingbestpicture,bestdirectorandbestactor.Oneanalysthasestimatedthatthefilmcouldgeneratecashflowasmuchas$350millionforViacom,Inc.,ParamountPicturesparentcompany.Suchsuccesshasinsuredthefilmaplaceamongthetopgrossingfilmsofalltimes.Thisisquiteanaccomplishmentforamoviethattooknineyearstomakeittothebigscreenandwhosescriptwasnotconsideredmateriallikelytoguaranteearunawayhitmovie.ButwasForrestGumpamoneymakerforParamountin1994?Filmsaretypicallydistributedtotheatresunderanagreementthatsplitsthegrossboxofficereceiptsapproximately50/50betweenthetheatreandthemoviestudio.Undersuchanagreement,paramounthadreceived$191millioningrossboxofficereceiptsfromtheatresasofDecember31,1994.Paramountreportsthatthefilmcosts$112milliontoproduce,includingapproximately$15.3millioneachpaidtostarTomHanksanddirectorRobertZemeckis,andproductionoverheadof$14.6million.Thisproductionoverheadischargedtothemovieatarateequalto15%ofotherproductioncosts.Notincludedinthe$112millionproductioncostswerethefollowingotherexpensesassociatedwiththefilm.Promotionexpensesincurredtoadvertise,premiere,screen,transportandstorethefilmtotalled$67millionattheendof1994.Anadditional$6.7millionadvertisingoverheadcharge(equalto10%ofthe$67millionpromotionexpenses)waschargedtothefilmbyParamount.Thesechargesrepresentthefilmsallocationofthestudioscostofmaintaininganin-houseadvertisingdepartment.Paramountalsochargedthefilmadistributionfeeof32%ofitsshareofgrossboxofficereceipts.ThisfeeisthefilmsallocationofthecostsincurredbyParamounttomaintainitsstudio-widedistributionservice.Finally,$6millionininterestsonthe$112millioninproductioncostswerechargedtothefilmbyParamount.
- 1. WasForrestGumpanaccountinghitintermsofnetincome,ascomputedbyParamount?
- 2. Intheiroriginalcontracts,actorTomHanksanddirectorRobertZemeckisweretoreceive$7millionand$5million,respectively,fortheirworkonForrestGump.However,afterthestudioaskedtheproducersforbudgetcuts,bothHanksandZemeckisagreedtoforegotheirstandardfeeforapercentageofthefilmsgrossboxofficereceipts.Sourcesestimatethatthenewagreementguaranteedeachofthetwo8%ofthestudiosshareofgrossboxofficereceiptsfromthefilm.Usingtheinformationavailableaboutthecostsofmakingthefilm,didForrestGumphaveapositivecontributionmargin?Assumethatallcostsnotspecificallyidentifiedasvariablearefixed.
- 3. IfHanksandZemeckishaddemandedtheiroriginalfeesupfrontinsteadoftakingapercentageofgrossboxofficereceipts,wouldForrestGumphavemademoneyin1994?
- 4. Otherindividualsassociatedwiththefilmsignedcontractsbasedonapercentageofnetprofitsratherthangrossboxofficereceipts,netprofitsbeingthefilmsprofitafterrecoupingofallthestudiosexpenses.Forexample,WinstonGroom,whowrotethenovelonwhichthemoviewasbased,received$350,000plus3%ofthefilmsnetprofits.EricRoth,thescreenwriter,signedasimilarcontractwithafixedfeeplus5%ofthefilmsnetprofits.Basedonyourcalculationsabove,howmuchdidthesetwoindividualsreceivefromtheirshareofthefilmsnetprofits?
- 5. HowmuchingrossboxofficereceiptswillthestudiohavetoreceivefromtheatersbeforeGroomandRothreceiveanymoneyundertheirnetprofitparticipationcontract?(Again,assumethatallcostsnotspecificallyidentifiedasvariablearefixed.)
- 6. Basedonwhatyounowknowaboutcontractsinthemovieindustry,whichtypeofcontractwouldastudiopreferactors,directorsandothersassociatedwithafilmtohave?Why?Whichtypeofcontractwouldtheactors,directors,andothersprefertohave?Why?
- 1. WasForrestGumpanaccountinghitintermsofnetincome,ascomputedbyParamount?
- 2. Intheiroriginalcontracts,actorTomHanksanddirectorRobertZemeckisweretoreceive$7millionand$5million,respectively,fortheirworkonForrestGump.However,afterthestudioaskedtheproducersforbudgetcuts,bothHanksandZemeckisagreedtoforegotheirstandardfeeforapercentageofthefilmsgrossboxofficereceipts.Sourcesestimatethatthenewagreementguaranteedeachofthetwo8%ofthestudiosshareofgrossboxofficereceiptsfromthefilm.Usingtheinformationavailableaboutthecostsofmakingthefilm,didForrestGumphaveapositivecontributionmargin?Assumethatallcostsnotspecificallyidentifiedasvariablearefixed.
- 3. IfHanksandZemeckishaddemandedtheiroriginalfeesupfrontinsteadoftakingapercentageofgrossboxofficereceipts,wouldForrestGumphavemademoneyin1994?
- 4. Otherindividualsassociatedwiththefilmsignedcontractsbasedonapercentageofnetprofitsratherthangrossboxofficereceipts,netprofitsbeingthefilmsprofitafterrecoupingofallthestudiosexpenses.Forexample,WinstonGroom,whowrotethenovelonwhichthemoviewasbased,received$350,000plus3%ofthefilmsnetprofits.EricRoth,thescreenwriter,signedasimilarcontractwithafixedfeeplus5%ofthefilmsnetprofits.Basedonyourcalculationsabove,howmuchdidthesetwoindividualsreceivefromtheirshareofthefilmsnetprofits?
- 5. HowmuchingrossboxofficereceiptswillthestudiohavetoreceivefromtheatersbeforeGroomandRothreceiveanymoneyundertheirnetprofitparticipationcontract?(Again,assumethatallcostsnotspecificallyidentifiedasvariablearefixed.)
- 6. Basedonwhatyounowknowaboutcontractsinthemovieindustry,whichtypeofcontractwouldastudiopreferactors,directorsandothersassociatedwithafilmtohave?Why?Whichtypeofcontractwouldtheactors,directors,andothersprefertohave?Why?
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