My Questions: (*please answer 2; I will post again for the other questions!)

The Movie

In the last century movies were distributed one-way only: through theatres. The accounting would certainly be simpler with one outlet than it is today! So for this case, let's imagine we are studying one particular award winning film, "the Movie", that was a big hit in the year XXXX and was projected to generate cash flow of as much as $350 million for Viacom, Inc., Paramount Pictures' parent company. Such success would insure the film a place among the top grossing films of all times! Times have most certainly changed!

But was the Movie a money maker for Paramount in year XXXX? Films were 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, XXXX. Paramount reports that the film cost $112 million to produce, including approximately $15.3 million each paid to the main star and the director, 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 year XXXX. 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 film's allocation of the studio's 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 film's 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.

Required Questions:

1. Was the Movie an 'accounting' hit in terms of net income, as computed by Paramount?

I need help to make an income statement based on the information above.

I already know that Revenue is $191M. The income statement is for the film ONLY and not for the company as a whole. The income statement is for internal reporting vs external reporting requirements (used within the organization vs being distributed outside the organization).

2. In their original contracts, the main actor and director were to receive $7 million and $5 million, respectively, for their work on the Movie. However, after the studio asked the producers for budget cuts, both the main actor and director agreed to forego their standard fee for a percentage of the film's gross box office receipts. Sources estimate that the new agreement guaranteed each of the two 8% of the studio's share of gross box office receipts from the film. Using the information available about the costs of making the film, did the Movie have a positive contribution margin? Assume that all costs not specifically identified as variable are fixed. What type of business leverage does this contribution margin represent?

I need help to calculate the contribution margin, please show all the calculations.

I already know that the variable costs have different cost drivers and that you can have more than one.

3. If the main actor and director had demanded their original fees up front instead of taking a percentage of gross box office receipts, would the Movie have made more of less money?

I need help to make a comparison summary of the production costs and to make an income statement.

I already know that I need to consider the merits of a variable cost structure vs a fixed cost structure and the associated risks.

4. Other individuals associated with the film signed contracts based on a percentage of 'net profits' rather than gross box office receipts, net profits being the film's profit after the recouping of all the studio's expenses. For example, the writer who wrote the novel on which the movie was based, received $350,000 plus 3% of the film's net profits. The screenwriter, signed a similar contract with a fixed fee plus 5% of the film's net profits. Based on your calculations above, how much did these two individuals receive from their share of the film's net profits? How much in gross box office receipts will the studio have to receive from theaters before the novel writer and screenwriter receive any money under their net profit participation contract?

I need help to make a Break-Even Analysis to determine how much the movie needs to make before the novel writer and screenwriter receive any money under the net profit contract.

I already know that I need to consider the importance of understanding accounting terms (e.g. net profit vs gross profit).