The Case of the Busted Blockbuster

You have been hired by a law firm representing an author who sold movie rights to a novel to a small studio in exchange for a share of the profits. The movie was wildly successful, but the movie studio has shown financial statements that reflect an overall loss and so refuse to pay the author any royalties.

Tiny Movie Studio
12 months ended Dec 31, 20XX
Gross receipts		$ 6,000,000
Distribution fees	15,000
Print materials	26,000
Dubbing, subtitles, etc.	10,000
Advertising and publicity	45,000
Taxes, duties, customs, and fees	10,000
Trade association fees	4,500
Insurance	6,000
Legal	16,000
Guild, union, and residuals	12,000
Talent	3,895,000
Catering	125,000
Accounting	65,000
Equipment depreciation	100,000
Set construction	625,000
Wardrobe	18,000
Special effects	450,000
Subcontracts	195,000
Staff	1,000,000
Total expenses		$ 6,617,500
Net income (loss)		$ (617,500)

• What recommendations would you give to the law firm in order to sort this out?
• What information would you need?
• What do you think are the direct costs? What costs are most likely indirect?
• How would you propose allocating indirect costs?
• What objections would you expect from the movie studio and how would you respond to those objections?
• What other cost accounting issues do you think exist in this scenario?
• How would your arguments change if you were the accountant for the defense (the movie studio)?