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 $16.00 each.

A large multinational corporation headquartered in Chicago will donate $2.00 per ticket sold.

Each concert attendee is expected to spend an average of $16.00 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 $6.50 per ticket sold.

The organizers will pay several companies to operate the parking, food, and merchandise concessions. They will pay $24,000 plus 14% of all parking, food, and merchandise revenue.

The organizers will pay the pavilion $85,000 plus $6.00 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 11,500 tickets are sold?    

4. How many tickets must be sold in order for concert profit to be $90,000?    

5. Assuming a tax rate of 31% on profits from the concert, what must dollar ticket sales be in order for after-tax concert profits to be $90,000?    

Part C
6. Assume that the organizers can negotiate the fixed portion of the pavilion's operating expenses. If the organizers expect to sell 11,500 tickets, how much operating fixed costs can they afford to pay and still earn a profit of $90,000 (ignore taxes)?

Answer 1

1. Contribution Margin per ticket sold

Contribution Margin per ticket sold = Sale Revenue – performance expense – Parking and food expense – Operating Expense

Contribution Margin per ticket sold = (16 + 2 + 16) – 6.50 – 16 * 14% – 6

Contribution Margin per ticket sold = 34 – 6.50 – 2.24 – 6

Contribution Margin per ticket sold = $19.26 per ticket sold

2. Estimated total fixed costs

Estimated total fixed costs = Pavilion Expense + Parking and food expenses

Estimated total fixed costs = 24000 + 85000

Estimated total fixed costs = $109000

3. Estimated Profit if 11500 tickets are sold

Estimated profit = Tickets sold * CM per ticket – Fixed cost

Estimated profit = 11500 * 19.26 – 109000

Estimated profit = $112490

4. Ticket sale required to reach a profit of $90000

Ticket Sales required = (Fixed Costs + Profit required) / CM per ticket

Ticket Sales required = (109000 + 90000) / 19.26

Ticket Sales required = 10332 Tickets

5. Ticket sales required to reach after tax profit of $90000

Ticket Sales required = (Fixed Costs + before tax Profit required) / CM per ticket

Ticket Sales required = (109000 + (90000/ 0.69)) / 19.26

Ticket Sales required = 12432

6. Computation of Pavilion’s Operating Fixed Expense affordable

Pavilion’s Operating Expense affordable = Ticket Sales * Contribution Margin – Profit required – Fixed Parking and food expenses

Pavilion’s Operating Expense affordable = 11500 * 19.26 – 90000 – 24000

Pavilion’s Operating Fixed Expense affordable = $107490