Question

Gryffindor House is a small theater located in Pittsburgh Pennsylvania. The theater contains 1,500 seats. You have recently been hired to manage the theater. Profits at the theater have been all over the place and the board would like you to make some recommendations about pricing of tickets. The board would like to make a profit of $50,000 per run. There are two shows where some decisions should be made. The first show is Goblets of Fire and the . second show is Flight of the Hippogriff. not penting income call seinen maus Coreadmori 5 Below is some information for Goblets of Fire shib 00 or geral) Ticket price $25 Variable costs $15 Fixed costs 2,000 will have 3 shows and that each show will be about 75% full. For the full run of For each question below use the information given to answer the question. It is expected that you will have 3 shows the show (all 3 shows) For each questio Show all work What is the Net Operating Income for this show? bakeven point for this show in units(seats)? Compare this to the expected What is the Breakeven point for this sh of units sold. Explain how this impacts the theater's profits number of units sold. Explain how Will Goblets of Fire meet the target profit set by the board? What is the Goblets of Fire's margin of Safety? You wonder if increasing the number of increase profits. Fixed costs would increase creasing the number of shows and adding a Thursday night show would costs would increase by $500. You expect that you would sell about sday night. Should you add Thursday night? Explain and be sure to use your calculations to support your argum

Third show was clarified as just the fixed cost according to my professor. I'm assuming all else is the same pricing wise for it too.

Answer 1

Contribution Format Income Statement

	75% Capacity- 3,375 tickets	100 % capacity- 4,500 Tickets
Sales Revenue@ $25 per ticket	$84,375	$112,500
Less: Variable Cost @ $15	50,625	67,500
Contribution Margin	$33,750	$45,000
Less: Total Fixed Cost for 3 s	2,000	2,000
Operating Income	$31,750	$43,000

1) Net operating Income for the full run of the show is $43.000

2) Break-even Points (in units) = Fixed Cost $\div$ Contribution margin per ticket

= $2,000 $\div$ ($25 - $15) = $2,000 $\div$ $10

= 200 tickets

Expected No of units sold (for $50,000 profit) = (Fixed Cost + Expected Profit) $\div$ C.M per unit =

=(2,000+ 50,000) $\div$ 10 = 5,200 Ticket

Expected Sales in units = 5,200 Ticket

Break even in units (tickets) is 200 tickets and the expected unit sales is 5,200 ticket. the expected sale 5,200 tickets  is 5,000 ticket more than the break-even sales. When 5,000 ticket are sold.the operating profit will be $50,000 (5,000 ticket $\times$ $10). This means that an additional unit sold over break even units provide a contribution margin of $10 per ticket and the fixed cost has already been recovered so it provides an operating profit of $10 per ticket sold.

3) No Goblet fire wont be able to meet the target profits even if it runs all three show at  the full capacity of 4,500 tickets (1,500 $\times$ 3). Because the required numbers of ticket sold is 5,200 and the actual no of tickets sold is only 4,500. So, it fails to reach target sales by 900 ticket.

4. Margin of Safety in $ = Actual Sales - Break even Sales

= (4,500 $\times$ $25 - 200 $\times$ $25) = $107,500

Margin of Safety in ticket = 4,500 ticket - 200 tickets = 4,300 tickets

5. Increasing no of show by adding Thursday night show where there is only 60% seat occupancy. The ticket sold on Thursday night will be (1,500 $\times$ 0.6) 900 ticket. So, the total sales unit will be (4,500 +900) 5,400 ticket but the fixed cost now will be $2,500 (2,000+ 500 additional) at the expected level of sales that is 5,200 units.

Surely, increasing show on Thursday will increase Contribution Margin by by $2,000 (200 $\times$ 10). and only $500 will increase with respect to Fixed cost. Thus, Total operating Profit will increase by $1,500 above the expected profit of $50,000 an will reach to $51,500.