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Chapter 7: Problem 3

Down On Our Luck Studios has spent \(\$ 100\) million producing an awful film, \(A\) Depressing Story About \(a\) Miserable Person. If the studio releases the film, the most cost-effective marketing plan would cost an additional \(\$ 5\) million, bringing the total amount spent to \(\$ 105\) million. Box office sales under this plan are predicted to be \(\$ 12\) million, which would be split evenly between the theaters and the studio. Additional studio revenue from video and DVD sales would be about \(\$ 2\) million. Should the studio release the film? If no, briefly explain why not. If yes, explain how it could make sense to release a film that cost \(\$ 105\) million but earns only \(\$ 12\) million.

Short Answer

Expert verified
It is not advisable for the studio to release the film, because the expected income (\$8 million) is significantly less than the total cost (\$105 million) of production and marketing.

Step by step solution

01

Calculate the total costs of the film production and marketing

The total costs include the production cost of \$100 million and marketing cost of \$5 million. So, the total cost = \$100 million + \$5 million = \$105 million.
02

Compute the total expected income

The expected income sources are from box office and DVD sales. However, for box office sales, the studio will only get half, which is \$12 million / 2 = \$6 million. The income from DVD sales is \$2 million. So, the total expected income = \$6 million + \$2 million = \$8 million.
03

Make a decision based on the results from Steps 1 and 2

Compare the total cost (\$105 million) with the total expected income (\$8 million). Since the cost is much higher than the income, it indicates a loss for the studio if it releases the film now. Hence, it's not advisable to release the film.

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