Forrest Gump was one of the biggest movie hits of 1994. The movies fortunes continued to climb in 1995, as it took home Oscars in six of the13 categories in which it was nominated, including best picture, best director and best actor. One analyst has estimated that the film could generate cash flow as much as $350 million for Viacom, Inc., Paramount Pictures parent company. Such success has insured the film a place among the top grossing films of all times. This is quite an accomplishment for a movie that took nine years to make it to the big screen and whose script was not considered material likely to guarantee a runaway hit movie. But was Forrest Gump a money maker for Paramount in 1994? Films are typically distributed to theaters under an agreement that splits the gross box office receipts approximately 50/50 between the theater and the movie studio. Under such an agreement, Paramount had received $191 million in gross box office receipts from theaters as of December 31, 1994. Paramount reports that the film cost $112 million to produce, including approximately $15.3 million each paid to star Tom Hanks and director Robert Zemeckis, and production overhead of $14.6 million. This production overhead is charged to the movie at a rate equal to 15% of other production costs. Not included in the $112 million production costs were the following other expenses associated with the film. Promotion expenses incurred to advertise, premiere, screen, transport, and store the film totaled $67 million at the end of 1994. An additional $6.7 million advertising overhead charge (equal to 10% of the $67 million promotion expenses) was charged to the film by Paramount. These charges represent the films allocation of the studios cost of maintaining an in-house advertising department. Paramount also charged the film a distribution fee of 32% of its share of gross box office receipts. This fee is the films allocation of the costs incurred by Paramount to maintain its studio-wide distribution services. Finally, $6 million in interest on the $112 million in production costs were charged to the film by Paramount.

Questions:

1. If the promotion expense and the total box office receipts has a linear relationship follows the linear function as Y=5x+47, where x represents the promotion expense, Y represents total box office receipts. Please run a sensitivity analysis on how much should Paramount spend on promotion expense to bring this movie project to break-even in the three scenarios that you have calculated individually.

2. Write a discussion on what are the problems in Paramounts accounting practice that led to such a great movie project into a financially unattractive project in the year of 1994. Please be specific on issues you can identify and provide your alternative solutions.