The Pritzker Music Pavilion in downtown Chicago is a technologically sophisticat

Question

The Pritzker Music Pavilion in downtown Chicago is a technologically sophisticated and uniquely designed performing arts venue that hosts live concerts attended by over half a million patrons a year. A group of local organizers, led by a prominent local businesswoman, would like to use the pavilion for a concert to benefit Ceres, a non-profit, national network of investors and environmental organizations working with companies and investors to address sustainability challenges such as global climate change. If the pavilion management agrees to host the concert, the organizers will donate all profits to Ceres (or absorb any losses).

There are three sources of revenue for the concert:
1. Tickets will be sold for $15.00 each.
2. A large multinational corporation headquartered in Chicago will donate $2.00 per ticket sold.
3. Each concert attendee is expected to spend an average of $19.00 for parking, food, and merchandise.
On the expense side,

1. A popular national group has agreed to perform at the concert. Normally, the group demands a significant fixed fee to perform, but to reduce the risk for the organizers, the group will charge $6.50 per ticket sold.
2. Parking and the food and merchandise concessions are operated by several companies. These companies are paid a total of $20,000 per concert plus 15% of all parking, food, and merchandise revenue.
3. Regular operating expenses for the pavilion (production, maintenance, advertising, etc.) are $80,000 per concert plus $7.00 per attendee.
Before proceeding with the concert, the organizers and pavilion management would like you to answer several questions.




1. What is the estimated contribution margin per ticket sold for the benefit concert?

2. What are the estimated total fixed costs for the benefit concert?

3. What is the estimated profit from the benefit concert if 8,500 tickets are sold?

4. How many tickets must be sold in order for concert profit to be $80,000?

5. Assuming a tax rate of 30% on profits from the concert, what must dollar ticket sales be in order for after-tax concert profits to be $80,000?

6. There is speculation that fixed operating costs for the concert may not be the same as the fixed operating costs for Pritzker's regular concerts. Assuming that 8,500 tickets are sold, how large can fixed operating costs be in for concert profits to be $80,000 (ignore taxes)?

Explanation / Answer

Tkts Rev = $15 + donatation $2 + 85% of $19 Prkkg Food etc = $15+2+16.15 = $33.15 Var cost = Grp Perf $6.50 + 15%*$19 Prking, Food etc + Op Exp $7 = $6.50+$2.85+$7 = 16.35 SO Est CM per tkt = $33.15 - $16.35 = $16.80 ............Ans (1) Est FC = Prkg & food $20,000 + Opex $80,000 = $100,000 ....Ans (2) If 8500 tkts are sold, Est Profit = No fo Tkts*Cont Margin per tkt - FC ie Est Profit = 8500*$16.80 - $100,000 = $42,800 .........Ans (3) For Profit of $80,000, Cont Reqd = FC + Profit = 100,000+80000 = $180,000 So No of Tkts * CM pu = $180,000 So No of Tkts = $180,000/$16.80 = 10715 Tkts approx ...........Ans (4) If Tax Rate is 30% & PAT is $80,000, So PBT = $80000/(1-30%) = $114,286 For Profit of $114,286, Cont Reqd = FC + Profit = 100,000+$114,286 = $214,286 So No of Tkts * CM pu =$214,286 So No of Tkts = $214,286/$16.80 = 12,755 Tkts approx So Tickest Sales is 12,755*$15 = $191,325 ...........Ans (5) If 8500 Tkts are Sold, Total Cont = 8500*$16.80 = $142,800 Now Total Cont - FC = Profit So FC = Total COnt - Profit = $142,800-80000 = $62,800 So Max FC can be $62,800 for a profit of $80000 ............Ans (6)

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