II.Bottom-Up Pricing

PART A:

Bryan Bessner has invested $850,000 in a small (360-seat) theatre. He would like to see a 15% after-tax return on his investment this year. Bryan faces a personal tax rate of 37%.

There are many costs involved in running a theatre. Estimates indicate that variable costs will use up 69% of the revenue earned by the theatre.

Fixed costs would be:

Salaries.....................$450,000

Insurance................... 25,000

License..................... 15,000

Utilities..................... 106,000

Also, depreciation on the theatre building itself would be 10% of the building's $1,500,000 book value.

Part of Bryan's investment (included in the $850,000 mentioned above) in the theatre came through a bank loan of $150,000, on which he will be paying 5.5% interest this year.

REQUIRED:

Please calculate the total amount of revenue that this theatre will need to earn this year, in order to meet all costs and allow for Bryan's expected after-tax return. (10 marks)

PART B:

Now that the revenue has been determined, Bryan wants to set his ticket prices. He knows that in the coming year, he will keep the theatre open for 120 nights, and his marketing team has determined that he should expect an 80% yield on average.

Please note again that the theatre has 360 seats.

Pricing Tranche data:

Tranche 1, paying top ticket price, representing 24% of ticket sales

Tranche 2, paying 70% of the top ticket price, representing 48% of ticket sales

Tranche 3, paying 55% of the top ticket price, representing the remaining ticket sales

REQUIRED:

Find the ticket price for each tranche, and then demonstrate with calculated proof

(a basic income statement), that with this pricing model, the revenue goal will be achieved.