Question

BBT Production is promoting a concert in Kuala Lumpur. The bands will receive a flat fee of RM7 million in cash. The concert will be shown worldwide on closed-circuit television. BBT will collect 100% of the receipts and will return 30% to the individual local closed-circuit theater managers. BBT expects to sell 1.1 million seats at a net average price of RM13 each.

Required:

a)	The general manager of BBT Production is trying to decide what amount to spend for advertising. What is the most BBT could spend and still break even on overall operations, assuming sales of 1.1 million tickets?
b)	If BBT desires an operating income of rm500,000, how many seats would have to sell? Assume the average price is RM13 and total fixed cost (advertising above)

Answer 1

Answer a)

Calculation of amount to be spent on advertising in order to break-even at 1.10 million tickets

Sales Revenue = Number of tickets sold X Average selling price per ticket

                           = 1,100,000 X RM 13 per ticket

                           = RM 14,300,000

Variable cost will be equal to the amount given to local closed-circuit theater managers (i.e. 30% of Sales revenue)

Variable cost = Sales revenue X 30%

                         = RM 14,300,000 X 30%

                         = RM 4,290,000

Total fixed cost will be equal to the flat fee of RM 7 million to the band plus the amount spent on advertising.

Total fixed cost = RM 7,000,000 + Advertising expense

At break-even point:

Sales revenue = Total variable cost + Total fixed cost.

RM 14,300,000 = RM 4,290,000 + RM 7,000,000 + Advertising expense

Advertising expense = RM 3,010,000

Therefore the amount to be spent on advertising is RM 3,010,000.

Answer b)

Calculation of number of seats to be sold to earn an operating income of RM 500,000

Selling price per ticket = RM 13

Variable cost per ticket = RM 13 X 30%

                                       = RM 3.90

Contribution margin per ticket = RM 13 – RM 3.90

                                                         = RM 9.10

Total Fixed cost = Fees Paid to band + Amount spent on advertising

                              = RM 7,000,000 + RM 3,010,000

                              = RM 10,010,000

Target income = RM 500,000

Number of seats to be sold to achieve desired income = (Total fixed cost + Target Income)/ Contribution margin per ticket

                                                                                            = (RM 10,010,000 + RM 500,000)/ RM 9.10 per ticket

                                                                                             = 1,154,945 tickets

Therefore, the company needs to sell 1,154,945 tickets in order to break-even.