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Compute the operating leverage factor

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Reference no: EM13176244

1. Identify the division that WWE should emphasize (consider expanding) in the near future. Assume there are no selling or capacity constraints. Briefly explain your answer and justify it with computations.

2. Choose one of the following pricing concepts to explain why the average ticket price for an international live event is greater than the average ticket price for a live event held in North America: markets, customers, competitors, politics and image, cost-plus pricing.

3. WWE's fastest growth has been abroad in international events: Between 2000 and 2009, WWE increased its revenues outside North America from $9 million to $127 million. International income in 2009 was $850 thousand, generated from televised events in 145 countries, in 30 languages." (Kelley, Austin, "Rogues' Gallery," Wall Street Journal, 3/11/10). Assume the contribution margin ratio for international events (this is part of the Live Events Segment which is part of the Live & TV Entertainment Division) was 46.17% in 2009.

a. Compute the operating leverage factor (OLF) for WWE's international accounts in fiscal year 2009. 

b. Briefly explain how the OLF specific to international events supports WWE's decision to aggressively expand their international accounts.

4. WWE's Superstars (i.e., performers) were paid 20% of the ticket revenue generated from Live Events in FYE 12/31/11. There is an ongoing discussion between WWE management and the Superstars about whether they should become employees of WWE and be paid a flat annual wage. In past negotiations between the Superstars and WWE, the total fixed wage has equaled $20 million annually. Live Events (a segment of the Live & TV Entertainment Division) generated an average of $415 thousand per show in ticket sales in 2011.

a. Compute the average variable cost and average contribution margin for each live event show in 2011?

2. How much of the variable costs for the average live event show relates to Superstar salaries in 2011?

3. At what point (the number of events) would WWE prefer to make the Superstars employees of WWE and pay them a fixed wage instead of paying them a variable wage? Assume WWE wants to maximize profits.

d. Was profitability greater than or less than what it would have been if the Live & TV Entertainment Division paid the performers a fixed salary in 2011? Briefly explain your answer with quantitative support.

5. WWE management is interested in knowing how many live events the Live & TV Entertainment Division must do before breaking even. Each live event generated an average of $415 thousand per show in ticket sales in 2011. For this problem only, assume all Live Event Segment revenue is from North America (this means you do not have to think about multiple products).

a. Compute the breakeven point assuming the interested manager is the manager of the Live & TV Entertainment Division.

b. Compute the breakeven point assuming the interested manager is the CEO of WWE.

c. Briefly explain why the breakeven points in parts a and b are the same or are different.

d. Explain why the Live & TV Entertainment Division's actual breakeven point(s) is likely less than the breakeven point(s) you computed in parts a and b. Remember that the numbers used to compute the breakeven point comes from actual financial data. Use only information provided in this exam to support your answer.

6. WWE is interviewing for a controller position for one of its divisions. The job candidate has been provided the same information that you have been provided on page 2 of this exam. The CFO asked the job candidate the following questions and the job candidate provided the following answers.

a. CFO's Question: "Assume that the contribution margin for the Live and TV Entertainment Division is 38%. Can you suggest a way that the Live & TV Entertainment Division can improve profits"?

Job candidate's answer: "Yes. The segment should only do live events in North America that have an expected contribution margin equal or greater than 38%".

Provide two reasons why the CFO is not impressed with the candidate's answer. Use only information provided in this exam to support your answers.

Reason #1 -

Reason #2 -

b. CFO's Question: "WWE is considering eliminating one of its segments. Based on financial considerations only, should we eliminate any of them"?

Job candidate's answer: "Based on the numbers WWE Studios should be eliminated because it is losing money."

Provide one reason why the CFO is not impressed with the candidate's answer. Use only information provided in this exam to support your answer.

c. List two opportunity costs that WWE should consider if it were to consider eliminating WWE Studios. Important note: In order to receive full credit for this problem your answer needs to clearly demonstrate that it is an opportunity cost.

Opportunity cost #1

Opportunity cost #2

7. The USA Network currently broadcasts select live events. WWE generates television rights revenues from this arrangement (WWE charges the USA Network a fee to broadcast WWE events). The cable channel, TNT wants the rights to exclusively show all WWE Live & TV Entertainment events. Currently, the USA Network has a contract where it is required to show a certain number of events per year (but not all events). 30 events were televised in 2011 and no other cable network televised events. TNT wants to show an event to test the idea and will not show an event that the USA Network is scheduled to show. What is the minimum amount that WWE should charge TNT for rights to show a live event (this is the same as the minimum price)?

8. WWE management wants to control SG&A (selling, general, and administrative) costs. The first step in doing this is to get an understanding of what drives these costs. WWE accountants obtain monthly cost information and use regression to derive the cost function below. What variable specific to WWE might the X represent (remember that these numbers are in thousands)? Briefly explain your answer.

Total SG&A = $8,025 + $45.4 X

Reference no: EM13176244

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