I need help answering this Accounting Case study thoroughly. All 5 questions are posted at the bottom of the document. Thank you!

Raytheon Amphitheater Case 1 One day in early November, Pam Berg, Manager of the Raytheon Amphitheater, was reviewing the operating results for the year just completed in preparation for the executive board meeting the following Friday. While the year ended in the black, she was disappointed that the Raytheon Amphitheater failed to earn the budgeted profit goal. This was the second year since Ms. Berg assumed the manager's position at the Raytheon Amphitheater. After the somewhat disappointing first year, she was determined to exceed the budgeted profit in the coming year. While not all events developed exactly as expected at the time of preparing the budget for the year, there were no major surprises during the year. Yet, the operating results are below the budgeted goal. In addition, Pam was frustrated by the lack of clear guidelines for contract negotiations with artists, for setting ticket prices, and in dealing with unexpected low ticket sales for certain concerts. THE RAYTHEON AMPHITHEATER FOR LIVE ENTERTAINMENT The Raytheon Amphitheater is an outdoor pavilion in Raleigh, North Carolina that provides live concerts to the public from April through October each year, hosting as many as half a million patrons a year. The seven-month season usually hosts an average of 40 concerts, and 12 year-round staff plan and manage each season. Live Nation Entertainment Inc. operates the pavilion. Live Nation is one of the largest diversified promoters, producers, and venue operators for live entertainment events in the United States. The Raytheon Amphitheater wants to be the nightlife for the Triangle (Raleigh-DurhamChapel Hill, NC) and eastern North Carolina, and one of the most beautiful, technologically advanced, and successful amphitheaters in the world. It features the most modern state-of-the-art acoustics and video of any facility of its kind. In the last few years, the Raytheon Amphitheater staged shows by the Dave Matthews Band, Toby Keith, Coldplay, Drake, Tim McGraw, Aerosmith, James Taylor, Blink 182, Matchbox 20, Mary J. Blige, and many other national, regional, and local artists. The Raytheon Amphitheater claims, \"There isn't a bad seat in the house. Whether you choose to spread a blanket on our gently sloping festival lawn or select a reserved seat in our pavilion seating area, you are guaranteed a great view of the action on the stage.\" Exhibit 1 shows the stage and seating of the amphitheater. History/Development The city of Raleigh and Pace Entertainment Company of Houston, Texas jointly built the Raytheon Amphitheater in 1991. Pace Entertainment and Cellar Door Inc. of Raleigh, NC had the initial contract to manage the pavilion. Hardee's Food Systems, Inc. of Rocky Mount, NC, the original sponsor of the amphitheater, paid an annual fee to carry its name and logo on all signs and ads regarding the amphitheater. The venue had gone through several names including the Huntington Pavilion and the Time Warner Cable Music Pavilion, named after different sponsors, until reverting back to the Raytheon Amphitheater in 2013. 1 Adapted from a case originally written by Edward Blocher and Kung H. Chen. Please do not quote or distribute. Revised January 2017. The demand for the outdoor facility came about because the rapidly growing city of Raleigh lacked a major entertainment complex, in the late 1980s Pace Entertainment and the city of Raleigh came to an agreement to build the facility. The city of Raleigh would own the land while Pace Entertainment would own the facility and assume sole operations of the facility; Cellar Door would do the booking for all the concerts. Pace Entertainment would pay income taxes on earnings from the use of the facility. In 1998, SFX Entertainment Inc. acquired Pace Entertainment Inc. The amphitheater facility and its employees became part of SFX Entertainment Inc. Also, in 1999 SFX Entertainment Inc. acquired Cellar Door Inc. and merged with Clear Channel Communications Inc., one of the largest owners of radio stations in the country. This move brought together both worlds of the entertainment business. In 2005, Clear Channel Entertainment was spun off in 2005 to form Live Nation, and merged with Ticketmaster in 2009 to form Live Nation Entertainment. Since its inception, Live Nation has become the largest concert promoter in the world. The Raytheon Amphitheater competes with the RBC Center at North Carolina State University in Raleigh (NCSU), the Dean Smith Activities Center at The University of North Carolina in Chapel Hill, NC (UNC), and the Verizon Wireless Amphitheater in Charlotte, NC, among others. In contrast to the facilities at NCSU and UNC that offer only indoor events, Raytheon offers outdoor as well as sheltered seating for its events. Marketing, Operations, and Accounting When the marketing department plans a promotion for an upcoming event, it coordinates with the sales department to see if there is a conflict in sponsorship. Marketing also coordinates with the operations department to effectively manage the activities on show days. Finally, the budget of each department (sales, marketing, and operations) is reviewed by the accounting department, which provides overall financial management of the project. Bringing Concerts to Reality A concert becomes reality in many steps. First, a group or performer with an interest in performing at Raytheon will discuss with Cellar Door Venues, Inc. (which is a subsidiary of Live Nation) and the amphitheater the possibility of performing at the venue, and look at the open dates. Upon reaching an agreement. Cellar Door, on behalf of Raytheon, signs a contract with the booking agent for the performer. A time is specified for gate openings, and once the gate is opened the show is underway. The job of the staff during a concert is to make sure every customer of the Raytheon Amphitheater has a pleasant experience and that the mission of the company is clearly seen by everyone that \"a concert ... it's better live.\" Clean Sweep Inc. handles the cleanup after a show. Key Business Issues Marketing has an important role in the success of the Raytheon Amphitheater, but marketing expenditures are carefully watched. For every show, the marketing budget is limited to $20,000. For many shows it is difficult to stay within the budget, since Raytheon serves a five-market region consisting of Raleigh-Durham, Fayetteville, Wilmington, Greensboro, and the Carolina Coast. Most of the marketing budget is spent on advertising with radio, TV, and print media in the designated regions. Prior to developing advertising plans, the marketing staff analyzes ticket sales 2 geographically over the five-market region. It is important to know the demographics of the five regions and compare them with the profile for each performer. The more Raytheon Amphitheater can know about the fans, the more they know where to spend the $20,000. Live Nation develops measures of performance and profitability for each advertising medium, by region. This type of analysis is important to the Raytheon Amphitheater because increased ticket sales, through effective advertising, not only affect ticket revenues, but also revenues from parking, merchandise, and concessions. It is also important because of the increased cost of advertising. The advertising rates in the Raleigh-Durham region are comparable to the rates in Washington, D.C. The rates are up 200 percent over the last five years, while the budgets per show are only up 15 percent over this time. The cost of the performing artist has also increased dramatically. The average fee for an artist is approximately $160,000. Some artists are paid on a fixed-fee basis, while others are paid on a per capita basis. Generally, the most popular artists seek a per capita contract because they are confident of a high level of attendance. In contrast, the artist paid a fixed-fee is guaranteed the same fee whether 100 or 20,000 people attend (the capacity of Raytheon is approximately 20,000 attendance). On average, the total number of paid tickets per fixed-fee concert is 7,000. The role of marketing and advertising is especially important for fixed-fee shows. One method Raytheon uses in addition to advertising is to distribute '"comp" tickets (comp tickets are free tickets distributed throughout the community) to build interest in Raytheon that will later be realized in paying customers. Comp customers also bring in revenue for parking, concessions, and merchandise sales. In a fixed-fee concert, the number of comp tickets is approximately 25 percent of the number of paying tickets. In comparison, a per capita show has no more than 2.5 percent of the total attendance (i.e., 20,000). Because of the increasing cost of the performing artists, Raytheon Amphitheater tries to reduce nonartist costs. Nonartist costs at Raytheon Amphitheater include expenses for sales, marketing, parking, security, concessions, and merchandise. Since assuming the manager position, Pam has developed several avenues to reduce nonartist costs and/or increase revenues and profits, including reducing expenses, having the parking service pass out flyers for upcoming events, trading "comp" tickets for online spots in the radio industry, and giving local businesses tickets in exchange for advertising on their premises. Revenues, Costs, and Flash Report for the SYMPHONY All-Stars Concert Exhibit 2 is a mock flash report for an illustrative fixed-fee show, the SYMPHONY AllStars. A flash report is a projection of costs and revenues for a scheduled concert. The guarantee/talent cost ($160,635) is the amount the SYMPHONY All-Stars are guaranteed for the show. Projected sales is the number of projected paying ticket holders, while the "drop count" is total attendance, including both paid and comp tickets. Setting ticket price is often done together with the performer, taking into consideration Live Nation's national and regional pricing policies, prices of comparable venues, and Raytheon's desired profit for the concert. Pam uses the flash report to plan potential concerts and to evaluate the success of concerts already presented. The report shows the variety of revenues and costs for a concert, and the projected profit for the concert. 3 The flash report projects total revenues including ticket sales, parking, food, and merchandise based on per capita (drop count) rates. Ticket sales are in four ticket categories: A seats and B seats are regular price tickets for the reserved and lawn seating sections respectively; C and D seats are promotional (discount) price tickets for reserved and lawn seating, respectively. Other revenues include per capita facility charges paid by the sponsoring corporation for naming rights (based on paid ticket holders) and a per capita service charge paid by the performer for food, transportation, and other services. Not included are the annual lease payments for VIP seats at $10,000 per year. Patrons to the VIP seats also have to pay the ticket price of A-level seats. Reserved and lawn seating areas are shown in Exhibit 1. The parking, food concession, and merchandise operations are outsourced to other service providers, so the direct costs for parking, merchandise and concessions are determined based on contracts with the service providers that include both a percentage (10 percent) of applicable revenues and a fixed fee. Operating expenses include an allocation of the total of fixed production and operations costs for the season, the advertising expenses for the SYMPHONY All-Stars event, and other variable expenses. These are then added to the direct costs for concessions, merchandise, parking, and insurance to determine total operating expenses. 4 EXHIBIT 1 Raytheon Amphitheater Stage and Seating The amphitheater can accommodate 20,000 fans with 7,000 reserved seats directly in front of the stage (covered seating in sections 1 through 9 and VIP seating) and another 13,000 on the spacious lawn. It has 78 theater-style VIP boxes that can accommodate 4, 6, or 8 people. In addition to positioning for prime viewing, patrons in VIP boxes also enjoy amenities such as wait staff service at their seats, personalized parking, and exclusive membership to the VIP Bar & Grill. Directly in front of sections 4, 5, 8, and 9 is seating with an elevated floor that provides excellent views of the stage for patrons with disabilities and additional seating for the hearing or visually impaired. 5 EXHIBIT 2 Flash Report for the SYMPHONY All-Stars Concert ARTIST NAME ACTIVITY/EVENT NUMBER EVENT MONTH EVENT DATE Projected Sales (Number of Seats) A Seats B Seats C Seats D Seats TOTAL Number of Seats Projected Ticket Price A Seats B Seats C Seats D Seats PROJECTED NET AFTER TAX ADMISSIONS AVG TIX PRICE NET OF TAX PER PAYING PATRON TALENT% GUARANTEE/TALENT COSTS NUMBER OF PERFORMANCES DROP COUNT (includes comp tickets) Other Ticket-Related Revenue FACILITY CHARGE Per capita SERVICE CHARGE Per capita REVENUE FROM TICKETING Per capita ANCILLARY REVENUES PARKING Per capita FOOD CONCESSION Per capita MERCHANDISE Per capita REVENUE FROM ANCILLARIES Per capita TOTAL REVENUE Per capita 6 The SYMPHONY Allstars 06302017 7 7/31/16 2,778 2,845 1,747 881 8,251 $36.29 $22.22 $11.31 $4.92 $182,479 $22.12 88.03% $160,635 1 10,349 $24,010 $2.91 $16,172 $1.96 $222,673 $26.99 $19,767 $1.91 $79,273 $7.66 $36,428 $3.52 $135,468 $13.09 $358,141 $34.61 EXHIBIT 2 (continued) Other Direct Costs PARKING CONTRACT CONCESSION CONTRACT MERCHANDISE CONTRACT TOTAL DIRECT COSTS Per capita PERCENT OF SALES $4,448 $43,356 $17,826 $226,265 $21.86 63.18% TOTAL REVENUE (from above) TOTAL DIRECT COSTS (from above) GROSS PROFIT $358,141 $226,265 $131,876 Operating Expenses TOTAL PRODUCTION EXPENSE TOTAL OPERATIONS EXPENSE TOTAL OTHER VAR. EXPENSE TOTAL ADVERTISING EXPENSE TOTAL OPERATING EXP Per capita PERCENT OF SALES OPERATING INCOME Per capita PERCENT OF SALES Detail: Other Concert Variable Expense Insurance Expense per person COGSConcession per person COGSMerchandise Inventory per person COGSParking per person Other Variable Concert Expense per person Total other variable expense per person TOTAL OTHER VARIABLE EXPENSE $15,506 $14,991 $18,007 $20,030 $68,534 $6.62 19.14% $63,342 $6.12 17.69% $0.17 $0.35 $1.12 $0.08 $0.02 $1.74 $18,007 7 Questions: 1. How would you describe the competitive strategy of the Raytheon Amphitheater? Given the firm's strategy, what are the critical success factors for Raytheon to achieve its goal of continuous annual growth in operating income? 2. Complete two selected cost-volume-profit analyses for the show illustrated in Exhibit 2, the SYMPHONY All-Stars: a) How many tickets must the Raytheon Amphitheater sell to break even? b) How many tickets must Raytheon sell to earn $50,000 in operating income? 3. What should be the average ticket price for the SYMPHONY concert if the fixed-pay fee is $200,000 and Raytheon expects to sell 7,000 tickets and wants to earn $40,000? 4. Negotiating the fee for the SYMPHONY All-Stars: fixed-pay or per capita contracts? a) What is the maximum fixed fee that Raytheon can pay the SYMPHONY All-Stars if Raytheon wants to earn $70,000 and expects the show to have an average ticket price of $22.12? Assume the show is expected to draw 6,000 paying ticket holders. b) What is the maximum fixed fee that Raytheon can pay the SYMPHONY All-Stars if Raytheon wants to earn $70,000 and expects the show to have an average ticket price of $22.12? Assume, including comp tickets, that the show is expected to be a sell-out. c) Independent of (a) and (b), what is the maximum per capita fee that Raytheon can pay the SYMPHONY All-Stars, whose concert is expected to be a sellout, if Raytheon wants to earn $300,000 from an average ticket price of $22.12 per ticket? 5. In contract negotiations with different types of performers, what contract (fixed-fee or per capita) would you, assuming the manager of the Raytheon amphitheater, choose and why? 8