Reyes, Lalaine M.

INTMANS K31 Case Submission

Module: Cost Topic: Cost Volume Profit Analysis

Adapted from: Managerial Accounting: Creating Value in a Dynamic Business Environment (10th Global
Edition). Hilton, R. W., & Platt, D. E., pp. 269-270, 282-284

Joey Tribianni, a recently retired actor, wanted to find a way to share his passion and love for
contemporary drama to the citizens of his hometown, New York City. Thus, he formed the New York
Contemporary Theatre as a nonprofit enterprise to bring contemporary drama to the Central New York area.
The organization’s part-time and unpaid board of trustees are comprised of local business professionals
who are also avid theatre fans. The board has hired the following full-time employees with their
corresponding wages:

Chandler Bing (Managing Director)

- Responsible for overall management of the organization
- Paid $3,000 a month, with taxes and benefits

Monica Geller (Artistic Director)

- Responsible for hiring actors and production for each play
- Paid $2,500 a month, with taxes and benefits

Rachel Green (Business Manager and Producer)

- Responsible for managing the theatre’s business functions and ticket sales, for directing the
production crew
- Paid $2,500 a month, with taxes and benefits

In addition to the above employees, the organization also sources various labor for the different
operations and department involved in theater, such as the production crew and the maintenance crew. The
production crew is in-charge of handling the staging, lighting, costuming, and makeup, while the
maintenance crew is in charge of the maintenance, cleaning, and upkeep of the theater. Additionally, the
organization would need to find people to fill the cast of actors involved in the plays. To do this, the
managers and directors put up advertisements all around the city in an effort to supplement the cast with
local volunteer talent.

Since the theater is owned by New York City, the board of trustees has negotiated several
agreements with them. The theater has not been used for 30 years, so the city agreed to refurbish it and to
provide lightning and sound equipment. In return, the city will charge the organization rentals of $10,000
a month plus a commission of $8 for every theater ticket sold. Thus, the organization has decided to price
its tickets at $16, double what the city is charging them. Additionally, in an effort to further improve the
state of the theater, New York City has agreed to refurbish 10 additional theater boxes in the building. Each
of these theater boxes contain 5 seats, which are more comfortable and provide people with a better view
of the stage than the general seats. The tickets for these box seats are priced at $20. Currently, the theater
has a total of 450 regular seats and 50 specialty box seats. Also, since the organization is eager to provide
as many performances as possible to the public, management set the theater’s sales target for the first month
of operations at $205,000.

After the first month of operations, the theater was able to sell only a total of 12,000 tickets. The
sales information for the tickets are shown in the table below

Seat Type Ticket Price Sales Mix Tickets Sold Revenue

Regular $16 90% 10,800 $172,800

Box $20 10% 1,200 $24,000

The board of trustees now wants an evaluation of the organization’s current situation in the form
of a report. They want management to evaluate the performance of the theater for the first month of
operations, and to provide suggestions as to how they could improve profits. After much deliberation and
analysis, management finally decided on the following alternative courses of action:

A. Lower the variable cost per unit by convincing the city to charge only $6.50 for every ticket sold.
The ticket price would also be reduced to $15 for general seats and $18.50 for box seats.
B. Increase the selling price to $18 for the generals seats and $23 for the box seats. Fixed and variable
costs would also be increased by 15%.
C. Cut fixed costs by $4,000 through reduction of salaries, and lower the sales price to $15.50 for the
regular seats, and $19 for the box seats.

Management decided to perform a cost-volume-profit analysis to obtain an overview of the effects

of the suggested courses of action on revenue and costs. Rachel Green, the business manager and producer,
prepared the following expense report for the month to aid in the analysis of the evaluation:

Fixed expenses per month:

Theater rental $10,000
Employees’ salaries and benefits
Chandler Bing 3,000
Monica Geller 2,500
Rachel Green 2,500
Actor’s wages 15,000
Production Crew’s wages 2,800
Maintenance Crew’s wages 2,800
Playwrights’ royalties for use of plays 5,000
Insurance 1,000
Fixed utilities 1,400
Advertising and promotion 800
Administrative Expenses 1,200
Total Fixed Expenses $48,000
Variable expenses per month:
City’s charge per ticket for use of theater $8
Other miscellaneous expenses 2
Total Variable Expenses $10

QUESTIONS

1. Determine New York Contemporary Theater’s weighted average contribution margin, its break-
even point in units, and break-even point in sales for general tickets and box tickets respectively.
a. $5.60; 6,000 tickets; $110,000; $14,500
b. $6.40; 7,500 tickets; $108,000; $15,000
c. $6.00; 8,000 tickets; $105,000; $16,000
d. $5.80; 7,000 tickets; $110,000; $15,000

Solution:
Weighted-average unit contribution margin = [($16-10) x 90%] + [($20-10) x 10%]
= $5.40 + $1.00
= $6.40
Break-even point in units = Fixed expenses / Weighted-average unit contribution margin
= $48,000/$6.40
= 7,500 tickets

Break-even point in sales = Break-even point in units x Selling price

BEP, Sales for general tickets = (7,500 tickets x 90%) x $16 = $108,000
BEP, Sales for box tickets = (7,500 tickets x 10%) x $20 = $15,000

2. Determine New York Contemporary Theater’s profit for the first month of operations.
a. $35,200
b. $34,500
c. $28,800
d. $40,000

Solution:
Regular seats sale [(12,000 x 90%) x $16] $172,800
Box seats sale [(12,000 x 10%) x $20] 24,000
Total revenue $196,800
Fixed costs (48,000)
Variable costs (12,000 x $10) (120,000)
Profit $28,800
 3. Determine how many tickets New York Contemporary Theater had to sell in order to meet its sales
target of $205,000.
a. 13,000 tickets
b. 11,500 tickets
c. 12,500 tickets
d. 13,500 tickets

Solution:
Let N = number of tickets:
[( N x 90%) x $16] + [( N x 10%) x $20] = $205,000
14.4N + 2N = $205,000
16.4N = $205,000
N = 12,500 tickets

4. Determine the profit New York Contemporary would have earned had they met its sales target of
$205,000.
a. $32,000
b. $35,000
c. $33,500
d. $31,500

Solution:
Total revenue $205,000
Fixed costs (48,000)
Variable costs (12,500 x $10) (125,000)
Profit $32,000

5. Assuming the three proposed alternatives were implemented at the start of operations, determine
the profit for each alternative at 12,000 tickets sold. Would the alternative with the highest profit
be greater than the profit the theater would have earned had they met their sales target?
a. $29,500; $24,400; $30,000; No
b. $24,700; $25,200; $15,000; No
c. $33,200; $27,500; $20,000; Yes
d. $34,200; $28,800; $16,200; Yes

Solution:
Alternative A
Regular seats sale [(12,000 x 90%) x $15] $162,000
Box seats sale [(12,000 x 10%) x $18.50] 22,200
Total revenue $184,200
Fixed costs (48,000)
Variable costs (12,000 x $8.50) (102,000)
Profit $34,200
Alternative B
Regular seats sale [(12,000 x 90%) x $18] $194,400
Box seats sale [(12,000 x 10%) x $23] 27,600
Total revenue $222,000
Fixed costs (48,000 x 1.15) (55,200)
Variable costs (12,000 x $10 x 1.15) (138,000)
Profit $28,800

Alternative C
Regular seats sale [(12,000 x 90%) x $15.50] $167,400
Box seats sale [(12,000 x 10%) x $19] 22,800
Total revenue $190,200
Fixed costs (44,000)
Variable costs (12,000 x $10) (130,000)
Profit $16,200