Question 1: Case study on Lydo Cinema Chain

Lydo Cinema Chain based in Melbourne, owns three cinemas in the suburbs of Camberwell, South Yarra and Ringwood. It has prepared budgets for the coming year based upon a ticket price of $20.

Included in the overhead figures are the Head Office fixed costs that amount to $750,000, these have been allocated to each cinema based on budgeted ticket receipts. All other costs are variable. The top management is concerned about the Ringwood cinema and the fact that it is showing a budgeted loss and is considering closing the cinema and selling the site to a Property Developer.

Required:

(a) Prepare marginal costing income statements to show contributions for each cinema and contribution and profit for the overall chain based on the original budget.

(b) Prepare marginal costing income statements to show contributions for each cinema and contribution and profit for the overall chain assuming Ringwood cinema is closed.

(c) Based on your calculations in requirement (b) above, do you think that Ringwood cinema should be closed? Justify your answer with appropriate explanation.

(d) What is the contribution per ticket sale at each cinema?

(e) What is the margin of safety in revenue for the chain at the budgeted level of activity if the Ringwood cinema is kept open?

(f) Whatisthemarginofsafetyinrevenueforthechainatthebudgetedlevelofactivityif the Ringwood cinema is closed?

(g) If the Ringwood cinema is kept open, management would like to increase its profitability. One suggestion is that ticket sales at Ringwood cinema can be increased by 60% by an advertising campaign directed at Ringwood that will add $20,000 to the chain's fixed costs. Do you think that the advertising campaign should be undertaken to improve the cinema's profitability? Give reasons for your decision.

Particulars Camberwell South Yarra Ringwood 1,500,000 1,250,000 750,000 Budgeted revenue from ticket sales Costs: Film license Wages and salaries Overheads Total costs 510,000 295,000 495,000 1,300,000 390,000 265,000 395,000 1,050,000 380,000 175,000 345.000 900,000