Reference no: EM132664432
Sandollar Productions Ltd
You have been retained as a finance consultant to advise Sandollar Production's management team about potential profitability scenarios. The production manager provided you with the following background of the most recent production.
- Sandollar Productions Limited has just finished production of the most recent sequel in its Illinois Jones series. The film cost $22 million to produce. Most production personnel and actors were paid a fixed salary (included in the $22 million); however, the two major stars of the film, Chevy Harrison and Sean Connelly, as well as the director and producer, Stephen Lucas and George Spielberg, all received equity interest in the film. In addition, the distributor of the film, Starfish Productions, receive royalties in exchange for its investment of $6.5 million to promote the film. The actors each receive 4% of revenues, the director and producer each receive 8% of revenues, and Starfish receives 12% of the revenues. Sandollar receives 65% of the total box office receipts, and out of this amount it pays the royalties to the actors, director, producer, and promoter.
At this point, management has the following questions:
Question 1. Given the above circumstances, what is the break-even point on the film to Sandollar expressed in terms of (a) revenues received by Sandollar and (b) total box office receipts?
Question 2. Assume that, in its first year of release, the box office receipts for the movie total $320 million. What is the operating income to Sandollar from the movie in its first year?
Sandollar Productions is negotiating the next sequel to its Illinois Jones series. This negotiation is proving more difficult than for the original movie. There is a risk that the series may have peaked and the total box office receipts will drop. The budgeted production cost excluding royalty payments is $32 million. The agent negotiating for Harrison and Connelly proposes either of two contracts:
Contact A: Fixed salary component of $50 million for both (combined) with no residual interest in the revenues.
Contract B: Fixed salary component of $8 million for both (combined) plus a residual of 3% each of the revenues.
The promoter, Starfish Productions, will invest a minimum of $12 million of its own money, and because of its major role in the success of the last film, it will now be paid 18% of the revenues received from the total box office receipts. Sandollar continues to receive 65% of the total box office receipts (out of which comes the royalty payments).
With the new information above, management want you to determine the following:
Question 3.The break-even point for Sandollar Productions expressed in terms of (a) revenues received by that company and (b) total box office receipts - for contracts A and B? Explain the difference between the breakeven points for contracts.
Question 4. Assume the sequel achieves $280 million in box office revenues. What is the operating income to Sandollar under each of the contracts? Comment on the results. Be specific.
- As an added service to your client, you provide operational assessments in the wake of the COVID-19 pandemic. The global response to COVID-19 has impacted both current and planned movie productions around the world. With the significant reduction in expected revenues, Sandollar Productions desperately needs additional financing to continue in business. Sandollar's President is meeting with the manager of the local bank at the end of the month to try to obtain this financing. The President approached the chief controller with two ideas to improve the company's reported financial position.
- First, he claimed that because a big part of the company's value comes from its knowledgeable and dedicated employees, the company should report their 'Intellectual Abilities' as an asset on the Balance Sheet (Statement of Financial Position).
- Second, he claimed that although the film economy is doing poorly and almost no-one is buying movie rights or production facilities, he is optimistic that eventually things will turn around. For this reason, he asked the chief controller to continue reporting the company's current long term movie assets on the Balance Sheet at its cost, rather than the much lower amount that business valuators say it's really worth.
- You understand the President's concerns but you will need to provide advice in response to the proposed finance ideas as to whether they are feasible in this COVID related economic state.
Required
- Using current literature, including newspaper, magazine, or journal articles, provide management with a brief overview of the potential losses to future projects and suggest ways to circumvent the negative economic impact the pandemic may have on the short and long term horizons specific to Sandollar Productions.
- Prepare quantitative analysis using Excel or other spreadsheet software
You may also want to reflect on...
1. The importance that managerial accounting decision-making tools may have to foster and sustain profitable operations in the short- and long-term,
2. the challenges the companies may presently, and continue to, face during this uncertain global health care call to action and how the managerial accounting decision-making tools can assist managers to either recalibrate or create new operational strategies, and
3. what you have learned about what it means to be an impactful, innovative, and/or effective leader in terms of navigating an organization through uncharted practice and operations.