Question no. 3

Bryan Bessner has invested $600,000 in a small theatre. He would like to see a 10% after-tax return on his investment this year. Bryan faces a personal tax rate of 40%.

There are many costs involved in running a theatre. Estimates indicate that variable costs will use up 67% of the revenue earned by the theatre.

Fixed costs would be:

Salaries.....................$572,000 Insurance...................$30,000 License..........................$8,000 Utilities........................$24,000

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

Part of Bryan's investment in the theatre was used to buy equipment, costing $175,000. This equipment depreciates by 20% per year.

Part of Bryan's investment in the theatre came through a bank loan of $200,000, on which he will be paying 8% interest this year.

REQUIRED:

1. 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.
2. If the theatre has 250 seats, and Bryan expects it to be open 4 nights per week for 50 weeks of the year, find the average seat price that must be charged in order to reach the revenue goal you calculated in part a above. Assume that on average, only 80% of seats can be sold each night.