Question

You have been retained as a finance consultant to advise Panther Production’s management team

about potential profitability scenarios. The production manager provided you with the following

background of the most recent production.

Panther Productions Limited has just finished production of the most recent sequel in its Illinois Jones

series. The film cost $22 million to produce. Most production personnel and actors were paid a fixed

salary (included in the $22 million); however, the two major stars of the film, Chevy Harrison and

Sean Connelly, as well as the director and producer, Stephen Lucas and George Spielberg, all

received equity interest in the film. In addition, the distributor of the film, Perrymount Productions,

receive royalties in exchange for its investment of $6.5 million to promote the film. The actors each

receive 4% of revenues, the director and producer each receive 8% of revenues, and Perrymount

receives 12% of the revenues. Panther receives 65% of the total box office receipts, and out of this

amount it pays the royalties to the actors, director, producer, and promoter.

At this point, management has the following questions:

1. Given the above circumstances, what is the break-even point on the film to Panther expressed in terms of (a) revenues received by Panther and (b) total box office receipts?

2. Assume that, in its first year of release, the box office receipts for the movie total $320 million.

What is the operating income to Panther from the movie in its first year? 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:

Contact 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, Perrymount 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).

With the new information above, determine the following:

3. What is the break-even 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.

4. 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. Be specific.

Answer 1