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 The Charlie Daniels
Band (CDB) and the Marshall Tucker Band (MTB) for their “Fire on the Mountain” tour, a
national road show. Both bands’ genre is southern rock. The Charlie Daniels Band is known for
such hits as “The Devil Went Down to Georgia” “Legend of Wooly Swamp” and “Still in
Saigon”, featuring Charlie Daniels on the fiddle.
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 $10,000.
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 $10,000.
Other areas where costs have increased dramatically include the cost of the performing artist.
The average cost for an artist is approximately $160,000. CDB/MTB is negotiating for a fixed
fee of $300,000. Some of the artists are paid on a fixed-fee basis and others are paid on a per
capita basis. 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 money spent on 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
ealized 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 a number of 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 Charlie Daniels Band 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 ($300,000) is
the amount CDB/MTB 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
this event, the drop count is projected to be about 108% of paying attendance. In other words,
for every 40 paying customers, there are 3 comp ticket awarded. The Flash Report then
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
CDB/MTB event, and other variable expenses.
REQUIRED
1) How would you describe the competitive strategy of the Rialto?
2) For the CDB/MTB show, 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) From the Rialto’s point of view, for which type of performer (fixed fee or per capita) is
eakeven analysis particularly important, and why?
4) From the performer’s point of view, for which type of performer (fixed fee or per capita)
is
eakeven analysis particularly important, and why?
5) CDB/MTB has tendered a second contract, which requests the following conditions:
a. CDB/MTB will receive a fixed contract rate of $120,000 plus 30% of all
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?
Which version of the contract should the Rialto accept?
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.