Panther Productions Ltd. You have been retained as a finance consultant to advise Panther Production's management team
Question:
Panther Productions Ltd.
You have been retained as a finance consultant to advise Panther Production's management team
about potential profitability scenarios. The production manager provided you with the following
background of the most recent production.
Panther Productions Limited has just finished production of the most recent sequel in its Illinois Jones
series. The film cost $22 million to produce. Most production personnel and actors were paid a fixed
salary (included in the $22 million); however, the two major stars of the film, Chevy Harrison and
Sean Connelly, as well as the director and producer, Stephen Lucas and George Spielberg, all
received equity interest in the film. In addition, the distributor of the film, Perrymount Productions,
receive royalties in exchange for its investment of $6.5 million to promote the film. The actors each
receive 4% of revenues, the director and producer each receive 8% of revenues, and Perrymount
receives 12% of the revenues. Panther receives 65% of the total box office receipts, and out of this
amount it pays the royalties to the actors, director, producer, and promoter.
At this point, management has the following questions:
1. Given the above circumstances, what is the break-even point on the film to Panther expressed in
terms of (a) revenues received by Panther and (b) total box office receipts?
2. Assume that, in its first year of release, the box office receipts for the movie total $320 million.
What is the operating income to Panther from the movie in its first year?
Panther Productions is negotiating the next sequel to its Illinois Jones series. This negotiation is
proving more difficult than for the original movie. There is a risk that the series may have peaked and
the total box office receipts will drop. The budgeted production cost excluding royalty payments is $32
million. The agent negotiating for Harrison and Connelly proposes either of two contracts:
Contact A: Fixed salary component of $50 million for both (combined) with no residual interest in the
revenues.
Contract B: Fixed salary component of $8 million for both (combined) plus a residual of 3% each of
the revenues.
The promoter, Perrymount Productions, will invest a minimum of $12 million of its own money, and
because of its major role in the success of the last film, it will now be paid 18% of the revenues
received from the total box office receipts. Panther continues to receive 65% of the total box office
receipts (out of which comes the royalty payments).
With the new information above, determine the following:
3. What is the break-even point for Panther Productions expressed in terms of (a) revenues received
by that company and (b) total box office receipts - for contracts A and B? Explain the difference
between the breakeven points for contracts.
4. Assume the sequel achieves $280 million in box office revenues. What is the operating income to
Panther under each of the contracts? Comment on the results. Be specific.
As an added service to your clients, you provide operational assessments in the wake of the COVID-
19 pandemic. The global response to COVID-19 has impacted both current and planned movie
productions around the world. Using current literature, including newspaper, magazine, or journal
articles, provide management with a brief overview of the potential losses to future projects and
suggest ways to circumvent the negative economic impact the pandemic may have on the short and
long term horizons specific to Panther Productions.