Washington Theater System entered into a three-year agreement with a local civic organization such that the organization would provide 5,000 of its patrons each month with a special ticket to attend a movie at Washington’s theaters. Each special ticket provides the patron with a ticket to the movie of their choice, a small bag of popcorn, and a small soft drink. After one year of utilizing this special movie ticket program, the civic organization decided that it would no longer continue with it. Washington Theater System sued the civic organization for damages. The court agreed that the civic organization was liable under the agreement for damages the theater incurred regarding the second and third year of the agreement. The following information items pertain to Washington’s alleged damages it suffered as a result of the civic organization’s action:

• The unit (i.e., per ticket) ticket price to the civic organization in the special movie program was $7.00 for each month during the life of the contract.
• Thirty percent of the ticket price must be paid by Washington to the movie distributor for viewing each movie.
• Five percent of ticket sales went to a marketing firm that sold the special ticket program to the civic organization.
• The unit material and container cost of the popcorn was $0.40.
• The unit material and container cost for each soft drink was $0.45.
• The monthly salary for a Washington Theater System manager hired to oversee the servicing of the special ticket program activities was $5,000.

Required:

1. Which of the items represents a variable cost? Which of the items represents a fixed cost?

The 30 percent amount that Washington Theater System must pay to the movie distributor is a fixed cost. In addition, the 5 percent amount paid to the marketing firm, the $0.40 unit material and container popcorn cost, and the $0.45 unit material and container soft drink cost represent variable costs. Finally, the monthly salary for special ticket program servicing represents a fixed cost.

Estimate the amount of monthly and total damages suffered by the Washington Theater System as a result of the civic organization’s unilateral contract cancellation.

Monthly damages	$
Total damages	$

2. Briefly explain one or more challenges that Washington Theater System’s accounting team might face in this forensic scenario after estimating the number of damages.

The accounting team will need to be able to clearly explain how it derived the number of estimated damages, including any unfavorable assumptions that went into the estimate. The accounting team will need to be able to defend why these particular assumptions were made.