Panther Productions is negotiating the next sequel to its Illinois Jones series. This negotiation is proving more difficult than for the original movie. There is a risk that the series may have peaked and the total box office receipts will drop. The budgeted production cost (excluding royalty payments) is $32 million. The agent negotiating for Harrison and Connelly proposes either of two contracts:
◆ Contract A. Fixed salary component of $50 million for both (combined) with no residual interest in the revenues.
◆ Contract B. Fixed salary component of $8 million for both (combined) plus a residual of 3% each of the revenues.
The promoter, Parimont Productions, will invest a minimum of $12 million of its own money, and because of its major role in the success of the last film, it will now be paid 18% of the revenues received from the total box office receipts. Panther continues to receive 65% of the total box office receipts (out of which comes the royalty payments).
1. What is the breakeven point for Panther Productions expressed in terms of (a) revenues received by that company and (b) total box office receipts—for contracts A and B? Explain the difference between the breakeven points for contracts A and B.
2. Assume the sequel achieves $280 million in box office revenues. What is the operating income to Panther under each of the contracts? Comment on the results.