1. Was Forrest Gump an 'accounting' hit in terms of net income, as computed by Paramount? As computed by Paramount it was not an accounting hit, since it resulted in a loss of $60 million. The gross revenue of $191 million could not exceed high costs like Production costs$66.8
Gross profit participation be directors, actor$30.6 Promotion & distribution costs$67.2 Distribution fee $61.1
2. How much in gross box office receipts will the studio have to receive from theaters before Groom and Roth receive any money under their net profit participation contract, as computed by Paramount?
Groom and Roth will not receive any money until the Break Even point has reached. See below for the CVP analysis with the calculation of Fixed and variable costs. Box Office Gross Revenue $382.00 $607.82
Paramount’s Gross Revenues (approx. 50%) $191.00 $303.91 Distribution Fee (32% of Revenues) $61.12 $97.25 Gross Profit Participation (16% Revenues) $30.56 $48.63 Studio Overhead (15% of Gross prof. Part. & Direct Costs $14.60 $17.31 Total Variable Costs $106.28 $163.19
Production Costs $66.80 $66.80 Promotion and Distribution Costs $67.20 $67.20 Advertising Overhead (10% of Promotion and Distribution Costs) $6.72 $6.72 Total Fixed Costs $140.72 $140.72
Financing cost $6.00 $ -
Total Profit $(62.00) $ -
Thus Groom and Roth will receive money after the box office Gross Revenue exceeds $ 608 million. Financing cost which is not a part of fixed or variable cost will be 0 in case of 0 profits or loss.
3. If you were Groom’s accountant, what is your estimate of the amount of box office revenue required before Forrest Gump actually earns a profit for Paramount?
If I were Groom’s accountant I will consider Production costs and Gross profit participation by director, actors as a genuine costs and will make following analysis on the others:
Distribution fees – It should not be a cost; it should be consider as a part of profit. Studio overhead -It should be lowered down from 15% to 10%. Advertising overhead - It should be lowered down from 10% to 7%. With all the mentioned changes the Break- Even point will reach with the Gross revenue of $353 million.