Question

American Cinema shows first-run movies. It pays the company distributing the movies a fixed fee of $ 1,000 per week plus a percentage of the gross box office receipts. In the first two weeks a movie is released, the theater pays the fixed fee of $ 1,000 per week plus 90 percent of gross box office receipts to the distributor. If the theater keeps the movie for weeks 3 and 4, the theater pays the distributor $ 1,000 per week plus 80 percent of its gross box office receipts received during those two weeks. American Cinema charges $ 6.50 per ticket for all movies, including those shown for two weeks and those shown for four weeks.
American Cinema must decide what movies to show and for how many weeks to show each movie (either two weeks only or four weeks) before the movie is released. For most movies, the audience demand is higher in the first two weeks than in the next two weeks.
American Cinema is evaluating two similar situation comedies. The first one, Paris Is for Lovers, is scheduled for release on October 1. The second comedy, I Do, is scheduled for release on October 14. American Cinema has decided to rent Paris Is for Lovers but must decide whether to run it for four weeks or to run it for two weeks and then replace it with I Do. Based on all the information about the stars in the movie, production costs, and prerelease publicity, management expects the two movies will have the same demand in the first two weeks and will have the same (lower) demand in weeks 3 and 4.

Required:
a. The only movie being released on October 14 is I Do. How should management go about deciding whether to rent Paris for four weeks or to rent it for two weeks and then replace it with I Do? In other words, provide American Cinema management with a decision- making rule to use in choosing between renting Paris for four weeks or just two weeks. American Cinema’s tax rate is zero. Be sure to justify your advice with clearly described analysis.
b. How does your answer in part (a) change if American Cinema’s income tax rate is 30 percent?
c. American Cinema’s average movie patron purchases soda, popcorn, and candy that yields profits of $ 2 after supplies and labor. How does profit on these concession items affect your answer to part (a)?



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  • CreatedDecember 15, 2014
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