Question

Forrest Gump was one of the biggest movie hits of 1994. The movie’s fortunes continued to climb in 1995, as it took home Oscars in six of 13 categories in which it was nominated, including best picture, best director, and best actor. One analyst has estimated that the film could generate cash flow as much as $350 million for Viacom, Inc., Paramount Pictures’ parent company. Such success has insured the film a place among the top grossing films of all time. This is quite an accomplishment for a movie that took nine years to make it to the big screen and whose script was not considered material likely to generate a runaway movie hit.

But was Forrest Gump a money maker for Paramount in 1994? Films are typically distributed to theaters under an agreement that splits the gross box office receipts approximately 50/50 between the theater and the movie studio. Under such an agreement, Paramount had received $191 million in gross box office receipts from theaters as of December 31, 1994. Paramount reports that the film cost $112 million to produce, including approximately $15.3 million each paid to star Tom Hanks and director Robert Zemeckis, and “production overhead” of $14.6 million. This production overhead is charged to the movie at a rate equal to 15% of other production costs.

Not included in the $112 million production costs were the following other expenses associated with the film. Promotion expenses incurred to advertise, premiere, screen, transport, and store the film totaled $67 million at the end of 1994. An additional $6.7 million “advertising overhead charge” (equal to 10% of the $67 million promotion expenses) was charged to the film by Paramount. These charges represent the film’s allocation of the studio’s cost of maintaining an in-house advertising department. Paramount also charged the film a “distribution fee” of 32% of its share of gross box office receipts. This fee is the film’s allocation of the costs incurred by Paramount to maintain its studio-wide distribution services. Finally, $6 million in interest on the $112 million in production costs were charged to the film by Paramount.

Other individuals associated with the film signed contracts based on a percentage of “net profits” rather than gross box office receipts, net profits being the films’ profits after the recouping of all the studio’s expenses. For example, Winston Groom, who wrote the novel on which the movie was based, received $350,000 plus 3% of the film’s net profits. Eric Roth, the screenwriter, signed a similar contract with a fixed fee plus 5% of the film’s net profits. Based on your calculations above, how much did these two individuals receive from their share of the film’s net profits? (Do not leave any answers field blank. Enter 0 for amounts.)

Roth		$enter a dollar amount
Groom		$enter a dollar amount

How much in gross box office receipts will the studio have to receive from theaters before Groom and Roth receive any money under their net profit participation contract? (Round answer to 1 decimal places, e.g. 52.7.)

Gross box office receipts

$enter the gross box office receipts in million dollars rounded to 1 decimal place  million

Answer 1

Gross Fees Collected		382
Production cost and overhead	112
Promotion exp	67
advertising overhead charge	6.7
distribution fee	61.12
interest exp	6
Total Cost		252.82
Net Profit		129.18
Winston Groom	38.754
Eric Roth	64.59

1. Based on your calculations above, how much did these two individuals receive from their share of the film’s net profits?

Roth

$64.59 M

Groom

$38.754 M

2.How much in gross box office receipts will the studio have to receive from theaters before Groom and Roth receive any money under their net profit participation contract?

Gross box office receipts

$126.41

As they have already received 191M as half of the gross box office receipt, so now they have to receive half of the amount incurred as expenses ie. 252.82/2= 126.41