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Facing stiff competition from the movie megaplexes, American Cinema Theatre (ACT) is considering becoming a discount theatre. This means ACT would show second-run movies; these are films that have previously been shown at first- run theatres. ACT would have to charge a lower ticket price for second-run movies but Bob and Trisha believe that the lower ticket price will increase their customer base -allowing teenagers, senior citizens, and large families to attend their theatre. Also, acquiring second-run movies is considerably less expensive then acquiring first-run movies which will decrease ACT's variable costs. There will be an increase in the fixed costs of $30,000 for advertising to inform the public of this change. The financial information is presented below, assuming 80,000 tickets are sold using the regular scenario and 100,000 tickets are sold under the discount theatre scenario due to the greater number of customers. Sales Variable costs Contribution margin Fixed costs Income before taxes Income taxes (32% rate) Net income Regular 960,000 640,000 320,000 140,000 180,000 57,600 122,400 Discount $ 700,000 370,000 330,000 170,000 160,000 51,200 $ 108,800 If the company wishes each scenario, regular theatre and discount theatre, to generate net income (after-tax) of $170,000, what is the amount of sales that needs to be generated? How many tickets will then need to be sold? Prepare a contribution margin statement for this step and verify that your after-tax net income in fact equals $170,000 for both the regular and discount theatre. Assume that the company expects ticket sales to decline by 20% next year. There will be no change in ticket price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two theatre types (assume a 32% tax rate, and that any loss before taxes yields a 32% tax savings). Assume that the company expects ticket sales to increase by 20% next year. There will be no change in ticket price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above with columns for each of the two theatre types (assume 32% tax rate, and that any loss before taxes yields a 32% tax savings). If sales greatly increase, which type of theatre (regular or discount) would experience a greater increase in profit? What if ticket sales declined - which theatre would experience a greater loss or reduction in income? Explain why. How does your calculation from (4) support your point? Thinking about movie ticket sales, is there any day of the week or time of day when greater sales are expected? Which theatre type is more sensitive to this occurrence? Which theatre type is less sensitive to this occurrence? Which theatre type is more advantageous and why? Is there anything else the company can do to manage the decline in sales that come with certain days and times
