Question

3.14. LA Theatres Inc. has two distinct revenue sources, ticket and concession revenues. The follow- ing information from LA Theatres Inc. income statements for the past three years is available: (in millions) 2015 2014 Ticket revenue Concessions revenue Total revenue Cost of goods sold-tickets Cost of goods sold-concessions Total cost of goods sold Gross profit 2016 $1,731 792 $2,523 $ 951 70 $1,642 687 $2,329 $ 854 69 $ 923 $1,120 411 $1,531 $ 549 48 $ 597 $ 934 $1,021 $1,502 $1,406 (a) Calculate gross profit margins for tickets and concessions for all three years. Calculate an overall gross profit margin for LA Theatres Inc. for all three years. (b) Analyze the changes in gross profit margin for all three years.

(c) Based on your analysis in (b), what recommendation would you give to LA Theatres to increase its gross profit margin?

Answer 1

a. Tickets.

	2016	2015	2014
Ticket Revenue	$ 1,731	$ 1,642	$ 1,120
Cost of Goods Sold: Tickets	951	854	549
Gross Profit	780	788	571
Gross Profit Margin	45.06 %	47.99 %	50.98 %

Concessions:

	2016	2015	2014
Concessions Revenue	$ 792	$ 687	$ 411
Cost of Goods Sold: Concessions	70	69	48
Gross Profit	722	618	363
Gross Profit Margin	91.16 %	89.96 %	88.32 %

LA Theaters Inc. :

	2016	2015	2014
Total Revenues	$ 2,523	$ 2,329	$ 1,531
Gross Profit	1,502	1,406	934
Gross Profit Margin	59.53 %	60.37 %	61.01 %

b. The gross profit margin for ticket revenues has decreased from 50.98 % to 45.06 % over the three year period. On the other hand, the gross profit margin for concessions revenue has increased from 88.32 % to 91.16 % over the same period. The overall gross margin has decreased from 61.01 % to 59.53 %, because though gross margin for concessions has improved, the gross margin from ticket sales has decreased by a larger percentage.

c. LA Theaters Inc. could improve its overall gross margin by:

• Increasing the price of the tickets.
• Reduce its cost of goods sold by better expense management.