Question

The Pritzker Music Pavilion in downtown Chicago is a technologically sophisticated and uniquely designed performing arts venue that hosts live concerts attended by over half a million patrons a year. A group of local organizers, led by a prominent local businesswoman, would like to use the pavilion for a concert to benefit Ceres, a non-profit, national network of investors and environmental organizations working with companies and investors to address sustainability challenges such as global climate change. If the pavilion management agrees to host the concert, the organizers will donate all profits to Ceres (or absorb any losses).

Based on the following revenue and cost information, the organizers would like answers to several questions.

There are three sources of revenue for the concert:

- Tickets will be sold for $15.00 each.

- A large multinational corporation headquartered in Chicago will donate $3.00 per ticket sold.

- Each concert attendee is expected to spend an average of $20.00 for parking, food, and merchandise.

On the expense side, there are also three components:

- A popular national group has agreed to perform at the concert. Normally, the group demands a significant fixed fee to perform, but to reduce the risk for the organizers, the group has agreed to perform for $7.00 per ticket sold.

- The organizers will pay several companies to operate the parking, food, and merchandise concessions. They will pay $23,000 plus 13% of all parking, food, and merchandise revenue.

- The organizers will pay the pavilion $80,000 plus $7.00 per person attending to cover its operating expenses (production, maintenance, advertising, etc.).

REQUIRED [ROUND YOUR CM ANSWER TO THE NEAREST CENT; ROUND ALL OTHER ANSWERS TO THE NEAREST UNIT OR NEAREST DOLLAR.]

Part A
1. What is the estimated contribution margin per ticket sold for the benefit concert?   

2. What are the estimated total fixed costs for the benefit concert?   

Part B
3. What is the estimated profit from the benefit concert if 8,500 tickets are sold?   

4. How many tickets must be sold in order for concert profit to be $100,000?   

5. Assuming a tax rate of 35% on profits from the concert, what must dollar ticket sales be in order for after-tax concert profits to be $100,000?

Part C
6. Assume that the organizers can negotiate the fixed portion of the pavilion's operating expenses. If the organizers expect to sell 8,500 tickets, how much operating fixed costs can they afford to pay and still earn a profit of $100,000 (ignore taxes)?  

Answer 1

Part A
1)
Revenue
From Ticket	$15.00
From parking, food, and merchandise.	$20.00
From Donation	$3.00
Total Revenue per Unit (a)		$38.00
Less: Variable Expenses
Performer Fees	$7.00
Concession to service provides = $20 x 13%	$2.60
Operating Expenses per unit	$7.00
Total Variable Expenses per unit (b)		$16.60
Contribution Margin Per Unit = (a - b)		$21.40
2)
Total fixed costs = $23,000 + $80,000	$103,000.00
Part B
3)
Sales = 8500 x $38	$323,000.00
Less: Variable Cost = 8500 x $16.60	-$141,100.00
Contribution Margin	$181,900.00
Less: Fixed Cost	-$103,000.00
Operating Profit	$78,900.00
4)
Required units = FC + TP/(SP -VC) = ($103000 + $100000)/$21.40	9486	Tickets
5)
Required Unite Sales = (Target Profit / 1 – Tax Rate + Fixed Costs) / Contribution Marginper Unit
Required Unite Sales = (100000 / 1 – 35%) + 103000) / $21.40	12002	Tickets
Dollar Sales = 12002 x $38	$456,081.96
6)
8500 = (FC + 100000)/$21.40
Total Fixed Cost = (8500 x 21.40)-100000	$81,900.00
Fixed Cost of Operating Expense = ($81,900 - $23000)	$58,900.00
operating fixed costs afford to pay	$58,900.00