Question

A movie company is making a new film. For the main role, they hired Johhny and he will receive a salary of $20,000,000 + 5% from admissions. The producer normally receives 40% of total paid admission whenever the movie is shown. Cost of production is $45,000,000. Also, a study of past films indicates that the producer can expect revenues from TV rights to be 12.5% of the producer's revenues from admissions.

Questions:

a) Considering the additional information about the sale of television rights, at what level of receipts to the producer will Blockbusters break even under Johny's contract terms ($20,000,000 plus 5% of the producer’s receipts)?

b) Johny asked for a special contract with a salary of $10,000,000, plus 15% of the receipts to the producer from admissions, plus 10% of the revenues from TV rights. At what level of receipts to the producer would Johny earn the same total income under both contracts?

Answer 1

Let's get the facts first

1) Producer will earn revenue from admission and from TV rights. Revenue from TV rights = 1/8th of revenue from admission

2) His cost of production excluding payment to Liam = $ 45,000,000

3) Liam has offered 2 proposals - Normal (N) and Special (S)

4) Under N, producer will pay him a fixed $ 20,000,000 plus 5% of revenue from admission

5) Under S, producer will pay him a fixed $ 10,000,000 plus 15% of revenue from admission plus 10% of revenue from TV rights

6) We have to find BEP to producer under both alternatives. BEP means total revenue = Total cost

7) If we assume revenue from admission to be 'x'. Revenue from TV = x/8. Total revenue = x+x/8 = 9x/8

8) Payment to Liam under N = 20,000,000 + 5x/100

9) Total cost under N = 45,000,000 + 20,000,000 + 5x/100

10) Payment to Liam under S = 10,000,000 + 15x/100 + 10/100×(x/8) = 10,000,000 + 15x/100 + x/80

11) Total cost under S = 45,000,000 + 10,000,000 + 15x/100 + x/80

12) BEP when revenue = cost under each alternative.

Solved in 3 sheets uploaded

BEP under N = Revenue from admission = $ 60,465,116

BEP Under S = Revenue from admission = $ 57,142,857

BEP is lower under S. Hence S is less risky to producer. Hence producer should prefer Special contract

Payment to Liam is higher under N ($ 23,023,256) as against S ( $ 19,285,714). Hence Liam should prefer Normal contract

1/3 BEP . Normal Contract Revenne Revenne from admission = Revenue from Tu rights = Total revenues (x+ Total cost = 45,00 00 00 + 20.000.000 65.000.000 + x qa こ Sue 100 = BEP when revenue to Cost 92 65.000.000 + se 100 92 = 65.000.000 100 65.000.000 に esxqx)_(Qx5x) 200 2252-10x 65.000.000 こ = 200 200 2150 65.000.ooo 200 65.000.000 x 60.465.116 215 We can verify Revenue from I rights = 60.465. 116 TV right = 8th = 7.558.140 Total revenue = 68,023,256 Payment to Liam = 20.000.000+ 3.023.256=23023.256 other lost = 45,000 000 Total Cost 68.023 256 ... Verified BEP under N → Revenue from = $ 60,465, 116 admission

Ele BEP - Special Revenue from admission TV rights Total revenue xxx 층 Pay to Liam= 10.000.000 + 15 رع = 92 que Tooxxt to TOO 100 10.000.000 + 152 a 거 80 = 10.000000 + (4x15x)+(5x) 400 10.000.000 + 65a 400 other cost 45000.000 .. Total Cost 650 = 55.000.000 t 400 Revenue Cost 93 55.000.000 + 65x 400 9x 65x = 55,oooooo 400 At BEP 55.000.ooo :. (50x920-65* 400 4502-65x 400 こ = 55,000 ooo 3850 400 55oooooo = X 55.000.000 x 400 385 57,142857

verification as Revenue from admission Revenne from TV rights t Y8th) 57.142857 7142857 64.285,714 Total revenue pay. to Liam = 10,000.000 + 15% of 57.142857 + 10% of 7,142,857 10,000.000 +8,571428+714.286 19,285,714 otha cost 455.000.000 Total cost 64,285,714 ..BEP under special Revenue from admission = $57.142857