Accounting Project

Description

American Cinema Theatre

Husband and wife, Bob and Trisha Johnson, decided to start their own business which would bring movies of all genres to their local community.  Together they have started the American Cinema Theatre, or ACT.  Bob is the “movie guy”, having his degree in film studies and some script writing experience.  He is responsible for determining and securing the films that ACT screens.  Trisha manages the front and back office; selling the movie tickets, paying the employees, and running ads for the theatre.

In its first year of operations the company sold 80,000 tickets and had the below sales and cost figures.

          The husband and wife team know that another challenging and competitive year lies ahead of them.  Now entering their second year of operations, they are considering two alternatives and have hired your consulting group, known for its inventive business and accounting consulting work, to help them make some important business decisions.

American Cinema Theatre

Alternative 1- Discount Theatre

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.

Required:

• Compute the company’s contribution margin under both scenarios, if ACT decides to remain a regular theatre and if they decide to become a discount theatre.  Compute the contribution margin both in total dollars and per unit.

• Compute the company’s contribution margin ratio under both scenarios. (Note: Do not round the CMR for accurate calculations in the following questions).

• Compute the break-even point in sales dollars under each scenario.  How many tickets will need to be sold under each situation to break-even?

• Compute the operating leverage under each scenario.  What does this figure mean?  Why is it important to management?

Alternative 1 Requirements (continued)

• 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?

• How do you recommend the company use the $30,000 advertising budget available under this scenario in order to achieve a maximum effect on their target audience?

• Compute the Profit Margin and Return on Assets for each scenario assuming average total assets of $2,000,000.  Industry averages are 12% and 5% respectively.

American Cinema Theatre

Alternative 2 – 3D Equipment

ACT is thinking about installing digital projection equipment. This type of advanced technology would help the theatre differentiate itself from its competitors.  This projection equipment would allow the theatre to offer a premium movie viewing experience to its audience and show 3D movies, meaning higher ticket prices.  Also, the new equipment would raise variable acquisition costs.  However, the equipment would increase fixed costs by $350,000, which represent one time purchase and installation costs.  This alternative is exclusive of alternative 1 -so use the original financial information from page 1 (also shown below) to calculate the effects of the new equipment.        

Additional Information: 

This alternative would allow ACT to increase their ticket prices to $17.50 and would increase the variable cost per unit by $1.50.  Assume ticket sales remain at 80,000.

• Compute the company’s new contribution margin under this alternative.  Compute the contribution margin both in total dollars and per unit.

• Compute the company’s new contribution margin ratio.

• Compute the break-even point in sales dollars.  How many tickets will need to be sold?

• Compute the new operating leverage.  What does this figure mean?  Why is it important to management?

• If the company wishes the 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.

Alternative 2 Requirements (continued)

• Assume that the company expects ticket sales to decline 20% next year with no change in ticket price.  Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above (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 20% next year with no change in ticket price.  Prepare forecasted financial results for next year following the format of the contribution margin income statement as shown above (assume 32% tax rate, and that any loss before taxes yields a 32% tax savings).

• If sales greatly increase, which type of theatre would experience a greater increase in profit (discount or 3D)?  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?

• Are there any monetary or non-monetary advantages of installing this superior equipment?  

• • Since no advertising budget is available under this alternative, what are some creative and low-cost methods the company could employ to help advertise the change to their theatre?  

11.)Compute the Profit Margin and Return on Assets assuming average total assets of $2,500,000.  Industry averages are 12% and 5% respectively.

American Cinema Theatre

Conclusion

Comparing your calculations from alternative 1 and alternative 2 -which does your group recommend to the Johnsons?  Why?  The company can only pick one of the alternatives, due to the time and resources involved, so you will need to make a compelling case to support your decision.  Be sure to identify the demographics and any other assumptions used in your analysis.

Project Requirements

• Written Report -formal written report stating your group’s choice for either alternative 1 or 2.  The report should be a minimum of 3 pages, maximum of 5 -double spaced and be structured accordingly:

• • Introduction –provide an overview of the current situation, the alternatives available, and the demographics for the business location your group has selected.
  • Alternative Choice & Justifications – state the alternative your group chose and cite the financial or qualitative reasons behind your choice.  Please use at least three outside sources (newspaper articles, etc.) in addition to your own calculations and cite your sources appropriately.    
  • Advantages & Disadvantages –address the advantages and disadvantages (both quantitative and qualitative) of both alternatives.  
  • Recommendations –provide any advertising or other business recommendations to the company to help them succeed in their implementation of the new alternative.  
  • Summary –summarize your stance and key points.

• Calculations/Responses –your group’s calculations and responses for alternatives 1 and 2 should be typed and neatly presented behind your report.  Work must be shown for calculations in order to receive full credit.