Reference no: EM132735165
Problem - Popular Cinema Chain based in Singapore, owns three cinemas in the suburbs of Orchard, Tampines and Outram. It has prepared budgets for the coming year based upon a ticket price of $20.
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Particulars
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Orchard
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Tampines
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Outram
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Budgeted revenue from ticket sales
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$1,600,000
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$1,200,000
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$800,000
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Costs:
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Film license
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$500,000
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$400,000
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$390,000
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Wages and salaries
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$300,000
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$250,000
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$160,000
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Overheads
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$500,000
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$400,000
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$350,000
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Total costs
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$1,300,000
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$1,050,000
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$900,000
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Included in the overhead ?gures are the Oxford Head Office ?xed costs that amount to $720,000, these have been allocated to each cinema based on budgeted ticket receipts. All other costs are variable. The management are concerned about the Outram cinema and the fact that it is showing a budgeted loss and is considering closing the cinema and selling the site to a Property Developer.
Required -
(a) Prepare marginal costing income statements to show contributions for each cinema and contribution and profit for the overall chain based on the original budget.
(b) Prepare marginal costing income statements to show contributions for each cinema and contribution and profit for the overall chain assuming Outram cinema is closed.
(c) Based on your calculations in requirement (b) above, do you think that Outram cinema should be closed? Justify your answers with appropriate explanation.
(d) What is the contribution per ticket sale at each cinema?
(e) What is the margin of safety in revenue for the chain at the budgeted level of activity if the Outram cinema is kept open?
(f) What is the margin of safety in revenue for the chain at the budgeted level of activity if the Outram cinema is closed?
(g) If the Outram cinema is kept open, management would like to increase its profitability. One suggestion is that ticket sales at Outram cinema can be increased by 50% by an advertising campaign directed at Outram that will add $40,000 to the chain's fixed costs. Do you think that the advertising campaign should be undertaken to improve the cinema's profitability? Give reasons for your decision.