Question

VIVA Incorporated, a leading producer of movies is currently negotiatingwith Robin Padilla, the biggest box-office attraction in the movie industry, to star in an adventure film. For a starring role, Robin normally receives a salary of $20,000,000 plus 5% of the receipts to the producer. (The producer normally receives 40% of the total paid admissions wherever the movie is shown). However, Robin is quite optimistic about the prospects for the film and has expressed some interest in a special contract that would give him only 25% of his normal salary but increases his portion of the receipts to the producer to 20%. Other than Robin's pay, costs of producing the picture are expected to be

$45,000,000.00.

Required:

Answer the following questions, calling the alternative compensation schemes N (for the normal contract) and S (for the special contract).

1.What are the breakeven receipts to the producer under each of the compensation schemes?

2.If total paid admissions in theaters are expected to be $200,000,000.00, what will be the income to the producer under compensation schemes N & S?

3.At what level of receipts to the producer would Robin earn the same total income under compensation schemes N & S?