Question

Companies can use three strategies to lower their breakeven point: 1. Increase selling price; 2. Decrease variable costs; 3. Decrease fixed costs. Thinking in terms of cost structure and breakeven point, explain how a movie theater might respond to a negative demand shock (a sudden significant drop in demand as a result of external events) such as happened after the September 11^th attack on the World Trade Center, Superstorm Sandy, etc.

• Your answer must specifically address each of the three strategies outlined above, and assess whether or not that strategy would be successful. (6 points)
  • BE SPECIFIC. You must indicate exactly how you would raise selling price or which specific variable/fixed costs you are recommending that the company decrease. While you may look at online sources to learn more about the industry, DO NOT copy information without providing proper citations. Also, you must include original information; do not rely solely on online sources.
• Finally, you must make a recommendation as to the best strategy, explaining why you chose it.

Answer 1

In this case where the movie theater is experiencing a negative demand shock the best option in front of it will be to reduce its variable costs as well as fixed costs. The theatre cannot increase its selling prices as increase of selling prices will not be feasible option in a situation in which the demand is already weakened. Here the consumer’s sentiment is negative and any increase in prices will only further reduce the footfalls in the theatre.

The movie theater will see an automatic reduction in its variable costs like expenses towards repair and maintenance, amount paid towards entertainment tax, electricity costs, flex banner printing costs etc. with a reduction in the number of people coming to the theater. As demand has dropped the theater can reduce the daily number of shows and hence this will reduce its variable costs.

The fixed costs for the theater will be salaries and wages of security guard, employee at the ticket counter, manager, theater operator, housekeeping staff. Besides these salary components other forms of fixed costs will be depreciation of premises, of the operating system and the projector, etc. The movie theater can ask some of its employees to take leave without pay for a temporary period. Alternatively it can ask its staff to take a nominal wage cut which will lead to significant cumulative fixed cost savings for the movie theater.

To conclude my recommendation is that the movie theater must completely disregard the first strategy i.e. increasing the selling price. Instead it should use a combination of the other two strategies of decreasing the variable costs and decreasing the fixed costs in a systematic manner so that its breakeven point is lowered.