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Chapter 9: Cost Volume Profit (CVP) Analysis and Strategy: The Rialto Square Theatre Background and History The Rialto Square Theatre (the Rialto) is a 2,000-seat theatre located in Joliet, Illinois....

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Chapter 9: Cost Volume Profit (CVP) Analysis and Strategy:
The Rialto Square Theatre
Background and History
The Rialto Square Theatre (the Rialto) is a 2,000-seat theatre located in Joliet, Illinois. Initially
owned by the six Rubens
others, it was completed in 1926 and built to host vaudeville acts and
silent movies. Entertainment tastes changed from live vaudeville acts to silent movies and then
to “talkies” and the Rialto accommodated the change in customer choices. As the population
shifted away from downtown retailers to large-scale shopping malls with multi-screen theatres,
the Rialto struggled financially and fell into serious disrepair. One alternative considered for the
uilding was demolition. Thankfully, a civic-minded individual, Miss Dorothy Mavrich,
initiated the “Save the Rialto Campaign”. Assisted by local businesspeople, she was able to
seek funding from city, state and federal individuals and have the theatre and its building become
egistered in the U.S. National Register of Historic Places. Through the vision of these selfless
volunteers, the stage of the Rialto once again hosts venue-appropriate live entertainment, offers
vintage film screenings, and rents the rotunda and esplanade for weddings and receptions.
The European architecture of the theatre is reminiscent of the Hall of Mi
ors in the Palace of
Versailles.1 Extensive bas-relief sculptures adorn the walls, ceiling and even on the outdoor
grand niche, rising over 100 feet above the marquee. The artist, Eugene Romeo, has worked on
various notable buildings in and around Chicago: The Board of Trade, the Chicago Daily News
Building, Soldier Field, the Merchandise Mart, Blackstone Theatre, Wrigley Building and the
Joliet Township High School Auditorium.2
The Will County Metropolitan Exposition and Auditorium Authority (WCMEAA) owns and
operates the entire facility. The WCMEAA is considering partnering with Blue Sky
Entertainment Inc. (BSE). BSE is the largest diversified promoter, producer and concert
operator for live entertainment events in the United States. The WCMEAA is considering
offering an average of 40 concerts with 12 year-round staff planning and managing each season.
BRINGING CONCERTS TO REALITY
A concert becomes reality in many steps. First, a group or performer with an interest in
performing at the Rialto will discuss with BSE the possibility of performing at the theatre and
look at the open dates. When agreement is reached, BSE and the booking agent for the
performer sign a contract. Each performing act has its own list of demands, which are
negotiated.

1 The Rialto Square Theatre, https:
ialtosquare.com/about/history/
2 The Rialto Square Theatre, https:
ialtosquare.com/about/history/

The job of the staff during an event is to make sure every patron has a pleasant experience and
that the mission of the company is clearly seen by everyone that “a concert….. it’s better live.”
After a show, It’s a Wrap, Inc. of Joliet handles the cleanup.
CONTRACT NEGOTIATIONS
The executive director and team are cu
ently negotiating a contract for Daughtry: The Dearly
Beloved Tour with Black Stone Che
y and Travis Bracht. The band’s recognition comes from
the band’s namesake, Chris Daughtry, who finished in fourth place on American Idol in 2006.
KEY BUSINESS ISSUES
Marketing has an important role in the success of each performance event, but marketing
expenditures are carefully watched. For every show, the marketing budget is limited to $5,000.
For many shows, it is difficult to stay within the budget since the Rialto hopes to draw patrons
from the southwest subu
s/collar counties as well as Chicago and northwest Indiana. Most of
the marketing budget is spent on advertising with radio, TV, internet and print media in the
designated regions. Prior to developing advertising plans, the marketing staff analyzes ticket
sales geographically. It is important to know the demographics of the regions and compare them
with the profile for each performer. The more the Rialto can know about the fans, the more they
know about where to spend the $5,000.
Other areas where costs have increased dramatically include the cost of the performing artist.
The average cost per performance is approximately $80,000. Daughtry is negotiating for a fixed
fee of $150,000. Some artists are paid on a fixed-fee basis and others are paid on a per capita
asis. Generally, the most popular artists seek a per-capita contract because they are confident
of a high level of attendance. In contrast, the artist paid on fixed basis is guaranteed whether 100
or 2,000 people attend (the capacity of the Rialto is approximately 2,000 seats). The fixed fee
shows often have a low projected attendance. These artists do not have the “draw” of the other
artists. In these types of shows, the role of marketing is extremely important, since the Rialto
must work hard to attract attendance for the show. As noted above, lower ticket sales also mean
less revenue generated from parking, concessions and merchandise, so effective marketing is
critical. One method the Rialto uses in addition to advertising is to distribute “comp” tickets to
media outlets such as radio stations to build interest that will hopefully be realized in the future
with paying ticket sales, and because comp customers will still spend on parking, concessions
and merchandise.
The cost of the performing artists grows annually, so it is very important for the Rialto to reduce
non-artist costs. There are several operating costs at the theatre, including expenses for parking,
security, concessions and merchandise. Also, there are a number of other methods used to make
the concerts more profitable. For example, the parking service passes out flyers for upcoming
events. Also, the theatre trades “comp” tickets for online spots in the radio industry and gives
local business tickets in exchange for advertising on their premises.
FUNDING AND FLASH REPORT
The sources of funding for the theatre are ticket revenues, concession (food) revenues,
merchandising revenues, parking revenues, sponsorship revenues and other. Exhibit A is a flash
eport for the Daughtry proposal. A flash report is a projection of what a concert or event will
cost and what revenues will be received. The guaranteed talent cost ($150,000) is the amount
Daughtry is guaranteed for the show. Attendance is the number of paying ticket holders, while
the “drop count” is total attendance both for paid tickets and comp tickets. For every 19 paying
attendees, there is 1 comp ticket awarded. So, in a bundle of 20 tickets, 19 are paying and 1
comp ticket is awarded for the performance only. The Flash Report projects total revenues,
including parking, concessions and merchandise. The parking, concession and merchandise
operations are outsourced to other service providers, so the direct costs for parking, merchandise
and concessions are determined based on contracts with the service providers which include both
a percent (20%) of applicable (parking, merchandise or concession) revenues and a fixed fee.
Operating expenses include an allocation of the total of fixed production and operations costs for
the fiscal year, the advertising expenses for the Daughtry event, and other variable expenses.
REQUIRED
1) What is the Rialto’s competitive strategy?
2) For the Daughtry event, how many tickets must the Rialto sell to
eak even? (Hint: you
need to separate the variable and fixed costs of concessions, parking and merchandise.)
3) Daughtry has tendered a second contract for consideration which requests the following
conditions:
a. DAUGHTRY will receive a fixed contract rate of $70,000 plus 25% of total
TICKET revenues
. The Rialto Square Theatre will provide additional musicians to enhance the
performance for several of the musical numbers. These musicians are hired from
the Chicago Federation of Musicians, the union for professional musicians. The
cost for the string and
ass instruments needed is $7,300.
c. What is the
eak-even analysis for this version of the contract negotiations?
4) What is the number of ticket sales where the fixed cost and per capita/fixed contracts are
equal,i.e., the point of indifference? (Hint: The initial solution is the drop count. Then,
allocate the drop count. It is a good idea to do a proof.)
5) Which Daughtry contract should the Rialto consider, the fixed fee or per capita, and why?
Q6 - Q8 responses should be in the section: ** This is a retitled step 5. **
Provide a reflection of the usefulness of Cost-Volume-Profit Analysis for future events
6) From the Rialto’s point of view, for which type of performer (fixed fee or per capita) is
eakeven analysis particularly important, and why?
7) From the performer’s point of view, for which type of performer (fixed fee or per capita) is
eakeven analysis particularly important, and why?
8) Will performers, such as the Eagles or Tim McGraw, ever perform at the Rialto?
For purposes of solving this problem, segregate the tickets only between paying and comp,
not by the type of ticket, i.e. A seat, B seats, etc. If you feel adventurous, you can solve
this by ticket type, but it is not required.

Exhibit A - Flash Report for Daughtry: The Dearly Beloved Tou
ARTIST NAME Daughtry
ACTIVITY/EVENT NUMBER XXXXXXXXXX
EVENT MONTH 3
EVENT DATE 3/8/2022
DROP COUNT 2000
Average
Projected Sales (Number of Seats) # of Seats Ticket Price Revenue net of comps
Main Floo
Orchestra AAA 40 $ XXXXXXXXXX,140.00$
Main Floor Orchestra BBB XXXXXXXXXX XXXXXXXXXX,817.50
Rows A-F XXXXXXXXXX325.00
Answered Same DayJan 24, 2022

Solution

Nitish Lath answered on Jan 25 2022
85 Votes
Solution 1:
The company is following niche- market/ focus marketing strategy and differentiation price strategy for its business. Under focus strategy the entity identifies a specific market or people of group and launch its products in the specific category. The company has also targeted to set its price strategy based on geographical area and the price will be different for each geographical area based on responses received or tickets expected to be sold. Further, under differentiation pricing strategy, the entity wants to create differentiation of its products and providing 1 out ticket out of 20 tickets as comp which will create interest for other stakeholders and in future it is expected to derive more benefits. Further, the company is also planning to adopt cost plus strategy in which based on higher cost plus desired operating margin, the entity will increase its ticket prices.
Solution 2:
Minimum number of tickets to be sold = fixed cost/ contribution margin per unit
                    = 276,363.20/ 197.71 = 1398 customers.
The entity is required to sold minimum 1398 tickets to achieve
eak even sales.
Calculation of fixed costs:
    Particulars
     Amount
    Fixed costs
     
    Talent
     1,50,000.00
    Parking contract (12042- 3600)
     8,442.00
    Concession contract (8127- 4522.80)
     4,522.80
    Merchandise contract (14065- 2666.60)
     11,398.40
    Production expenses (Sound, light)
     15,000.00
    Operating expenses
     82,000.00
    Advertising expenses
     5,000.00
    Total fixed costs
     2,76,363.20
Calculation of...
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