A cable television network is considering cancelling the program “Law
and Order” because it is watched by only 2.3 percent of the audience in its
Monday evening time slot. It would be replaced by “Desperately Seeking Mr.
Right,” a new show being created from the same formula as the popular
“Friends.” Market research indicates that “Desperately Seeking Mr. Right”
would be watched by 4 percent of the audience in the same time slot. For
audiences between 1.5 percent and 5 percent, the network believes each
1 percent of the audience in this time slot results in additional advertising revenue
of $40,000 per week (including beneficial effects on other programs,
both present and future). Replacement would come halfway through the 30-
week season.

The network's accounting staff has prepared the following financial infor- mation to be used in making the decision: Developmental expenses for "Law and Order" were $600,000, and these are being amortized over the originally projected complete sea- son (30 programs). Developmental expenses for "Desperately Seeking Mr. Right" were $900,000. If "Desperately Seeking Mr. Right" is shown for the sec- ond half of this season, the entire development cost must be amor- tized over those 15 programs. If it is not aired until next season, amortization will take place over 30 programs. The cost of a script for one program of "Law and Order" is $20,000 and for "Desperately Seeking Mr. Right" is $24,000. No contract for scripts for "Desperately Seeking Mr. Right" has yet been signed, but a con- tract for 20 programs of "Law and Order" was signed and the $400,000 was already paid. The star of "Law and Order" is under contract to the network for the entire season at $240,000. If "Law and Order" is cancelled, the star will do one special in the spring; if "Law and Order" continues, he will not do the special. If the star does not do the special, another person (with completely equivalent audience appeal) will be hired for $40,000 to do the special. The star of "Desperately Seeking Mr. Right" has been hired for the next season for $180,000. If she does 15 shows this season, she will have to forego a part in a movie. Consequently, she must be paid $120,000 for 15 shows this season. Investment in the set for "Law and Order" was $100,000, which was immediately expensed. Additional expense for the set averages $10,000 per show. If "Law and Order" is cancelled, the set can be sold for $20,000. Another alternative use of the set is for a TV movie that the network is planning. Additional set expenses for the movie would be $50,000, but building a completely new set would cost $80,000. "Desperately Seeking Mr. Right" is filmed on location; thus, there is no investment required for a set. However, $20,000 per show is required to make the location suitable for filming. The production crew of "Law and Order" (including actors other than the star) receives $50,000 per show. Most of these people could be used profitably in other operations at the network. However, two actors must be fired if the show is cancelled, and the actors' union requires severance pay of $4,000 each. There will be a large startup cost of production for "Desperately Seeking Mr. Right" because of suddenly needing it six months ahead of schedule. This will amount to $150,000, only $60,000 of which would be necessary if it were not aired until next season. The produc- tion crew is very important to "Desperately Seeking Mr. Right," and they receive $80,000 per show. The network allocates corporate overhead to each show by a com- plex formula. Each program of "Law and Order" was allocated $20,000 of overhead; each program of "Desperately Seeking Mr. Right" will be allocated $30,000 of overhead. The only corporate overhead expense that would change if "Desperately Seeking Mr. Right" replaced "Law and Order" is the consultation time that corpo- rate management spends with the production staff. This averages 10 percent of the total production crew expense. This decision is to be made by top management, who will invest about $20,000 of their time and effort in it. In addition, a consultant will be paid $4,000 to review the decision. Should the network cancel "Law and Order" and replace it with "Desperately Seeking Mr. Right" immediately? Explain. Be sure to describe the information that was relevant to this decision and compute the monetary advan- tage or disadvantage to switching from "Law and Order" to "Desperately Seeking Mr. Right."