Question:

Apply the cost-volume-profit analysis to compute the break-even point. Assume the financing costs are fixed. Show your work.

Movie industry accounting can be every bit as creative as a good movie script. At least, that is what some lawyers and journalists seem to be telling us. According to news reports, the hit movie Joseph's Garage , which was nominated for the "Best Picture of 2019 " at the Academy Awards, claimed a worldwide theatrical gross of USS661 million through May of 2020 . That amount excludes dvd and sound tract revenues, and it does not include licensing fees on Joseph's Garage products such as evening gowns, high style purses, and cookbooks. Yet, according to Hollywood Studio, the film project lost US\$62 million on a box office gross of US $382 million through December, 2019 (see Exhibit1). Joseph's Garage is the latest of string of hit movies to report a loss. Each of these hit movies grossed well over US 100 million, but in each case, costs were reportedly greater than revenues. The production costs for a film represent only a fraction of the cost of the project. In addition, studios add advertising and promotion, distribution, and financing costs of the project. A significant portion of the production costs are the payments made to "gross participants" on the basis of a percentage of the studio's gross revenues. This leads to what movie industry accountants and lawyers refer to as the "rolling break." Two of the costs (the amount retained by the theaters and the gross profit participation) may, for some motion pictures, change with changes in the amount of the box office gross and over time. Kevin Ling, executive editor of The Movie industry Reporter explains: "A rolling break means that the break-even point - that point at which a movie has gone from a loss to a profit - changes after the release of the film, depending on the payments made to the start talent involved. A picture that has a big profit participation by a star actor, director or producer is never considered by studio accounting to break even." Typically, profits are calculated based on contracts between the studios and the film's "net profit participants." In a typical net profit participation contract, "profit" is calculated after deducting a distribution fee paid directly to the studio, studio overhead (some of which is allocated to the film as a percentage of the gross), and interest on the unrecovered costs, whether or not the film was financed with debt. One studio executive explains the accounting this way: "What you've got there is a statement reflecting a contractual agreement of contingent compensation for a particular individual. So whether it's The Guardian of the Universe or any other motion picture, an accounting statement always reflects an individual arrangement based upon certain agreed-upon conditions. It's the studio's obligation to fairly and accurately comply with the contractual arrangement agreed upon by both the studio and that individual." Historically, reported losses on hit motion pictures have resulted in lawsuits being filed by the net profit participants. As far back as in 1988 in Hollywood, Art Buchwald and Alain Bernheim were awarded US $900,000 by the Los Angels Superior Court to cover their 19% participation in the net profits of Coming to America, even though the studio claimed the film never made money. Winston King, the author of Joseph's Garage retained an attorney to get a share of the profits from the film, even though Hollywood Studio is reporting a loss. King was paid US 550,000 for the movie rights to the book and is entitled to 3% of the film's net profits. Hollywood Studio says it expects Joseph's Garage to eventually show a profit, and has advanced Xu US $50,000 against his net profit participation. At issue in these lawsuits is the way the studios calculate "net profit." Critics argue that some of the costs (such as the distribution fee), listed in a net profit participant statement like Exhibit 1, are not really costs at all; instead, they are studio profits disguised as costs. Overhead allocations such as "studio overhead' and "advertising overhead" are based on arbitrary allocations which, some have argued, are much greater than the actual overhead costs which are attributable to the film. In addition, some of the lawsuits have questioned whether the net profit participants should lose compensation because of costs overruns which are largely under the control of the director, the stars, and studio. Will Hollywood Studio ever report profit for the film, Joseph's Garage ? That depends upon how you define profit and whose perspective you are taking. Lead Actor Jacki Smart and director Jackson Ward have already made more than US $10 million each, including a share of the "gross." However, from the point of view of the "net profit participants" (e.g., Winston King), the film may or may not break even. T 1.101 Movie industry accounting can be every bit as creative as a good movie script. At least, that is what some lawyers and journalists seem to be telling us. According to news reports, the hit movie Joseph's Garage , which was nominated for the "Best Picture of 2019 " at the Academy Awards, claimed a worldwide theatrical gross of USS661 million through May of 2020 . That amount excludes dvd and sound tract revenues, and it does not include licensing fees on Joseph's Garage products such as evening gowns, high style purses, and cookbooks. Yet, according to Hollywood Studio, the film project lost US\$62 million on a box office gross of US $382 million through December, 2019 (see Exhibit1). Joseph's Garage is the latest of string of hit movies to report a loss. Each of these hit movies grossed well over US 100 million, but in each case, costs were reportedly greater than revenues. The production costs for a film represent only a fraction of the cost of the project. In addition, studios add advertising and promotion, distribution, and financing costs of the project. A significant portion of the production costs are the payments made to "gross participants" on the basis of a percentage of the studio's gross revenues. This leads to what movie industry accountants and lawyers refer to as the "rolling break." Two of the costs (the amount retained by the theaters and the gross profit participation) may, for some motion pictures, change with changes in the amount of the box office gross and over time. Kevin Ling, executive editor of The Movie industry Reporter explains: "A rolling break means that the break-even point - that point at which a movie has gone from a loss to a profit - changes after the release of the film, depending on the payments made to the start talent involved. A picture that has a big profit participation by a star actor, director or producer is never considered by studio accounting to break even." Typically, profits are calculated based on contracts between the studios and the film's "net profit participants." In a typical net profit participation contract, "profit" is calculated after deducting a distribution fee paid directly to the studio, studio overhead (some of which is allocated to the film as a percentage of the gross), and interest on the unrecovered costs, whether or not the film was financed with debt. One studio executive explains the accounting this way: "What you've got there is a statement reflecting a contractual agreement of contingent compensation for a particular individual. So whether it's The Guardian of the Universe or any other motion picture, an accounting statement always reflects an individual arrangement based upon certain agreed-upon conditions. It's the studio's obligation to fairly and accurately comply with the contractual arrangement agreed upon by both the studio and that individual." Historically, reported losses on hit motion pictures have resulted in lawsuits being filed by the net profit participants. As far back as in 1988 in Hollywood, Art Buchwald and Alain Bernheim were awarded US $900,000 by the Los Angels Superior Court to cover their 19% participation in the net profits of Coming to America, even though the studio claimed the film never made money. Winston King, the author of Joseph's Garage retained an attorney to get a share of the profits from the film, even though Hollywood Studio is reporting a loss. King was paid US 550,000 for the movie rights to the book and is entitled to 3% of the film's net profits. Hollywood Studio says it expects Joseph's Garage to eventually show a profit, and has advanced Xu US $50,000 against his net profit participation. At issue in these lawsuits is the way the studios calculate "net profit." Critics argue that some of the costs (such as the distribution fee), listed in a net profit participant statement like Exhibit 1, are not really costs at all; instead, they are studio profits disguised as costs. Overhead allocations such as "studio overhead' and "advertising overhead" are based on arbitrary allocations which, some have argued, are much greater than the actual overhead costs which are attributable to the film. In addition, some of the lawsuits have questioned whether the net profit participants should lose compensation because of costs overruns which are largely under the control of the director, the stars, and studio. Will Hollywood Studio ever report profit for the film, Joseph's Garage ? That depends upon how you define profit and whose perspective you are taking. Lead Actor Jacki Smart and director Jackson Ward have already made more than US $10 million each, including a share of the "gross." However, from the point of view of the "net profit participants" (e.g., Winston King), the film may or may not break even. T 1.101