Question

Question 1: Case study on Popular Cinema Chain
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.
Particulars Orchard Tampines Outram
Budgeted revenue from ticket sales $1,600,000 $1,200,000 $800,000
Costs:
Film license $500,000 $400,000 $390,000
Wages and salaries $300,000 $250,000 $160,000
Overheads $500,000 $400,000 $350,000
Total costs $1,300,000 $1,050,000 $900,000
Included in the overhead figures are the Oxford Head Office fixed 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.

Answer 1

sol:

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