The Western North Carolina Playhouse.

Little, Philip L. ; Little, Beverly L.

CASE DESCRIPTION

The primary subject matter of this case concerns managerial accounting cost behavior concepts. The case has a difficulty level of five, appropriate for first year graduate students. The case is designed to be taught in 3 class hours and is expected to required 5-6 hours of outside preparation by students.

CASE SYNOPSIS

This case requires students to apply managerial accounting concepts beyond the traditional manufacturing/production problems, by having them make recommendations to a regional playhouse as to how many plays to produce (evening v. matinee), how much to spend on those plays, and how to raise outside funds for renovation.

INTRODUCTION

The Western North Carolina Playhouse (WNCP) was completed in 1918 at a cost of $30,000. P.L. Wiseman, an architect from the Western North Carolina area, designed the Arts & Craft inspired structure. The building was designed as a place of entertainment for the local citizenry. The building is an excellent example of the Arts & Craft movement of that era.

The building was constructed with brick from three local brickyards. The granite used in the construction came from a quarry in the Western North Carolina area. Local craftsmen's and artisans' talents in woodworking and masonry were used throughout the construction of the original building. A gas lighting system was installed with a reflector, or "sun burner", for added brilliance. Drop curtains and seven scenes or sets for the stage were available. One scene, a landscape, survived to the late 20th century.

The WNCP quickly became know as "the entertainment center of the Blue Ridge Mountains." On its stage appeared touring companies of New York plays, minstrel and variety shows, famed vocalists and lecturers, magicians and mind readers, novelty acts and boxing exhibitions. The WNCP was used not only by professional performers, but also by the community. Meetings, dances, college commencement exercises and musicals were held in the spacious auditorium.

Silent "moving pictures" were shown at the playhouse in the early years. Slowly, movies replaced the big stage shows, and in the late 1920's the playhouse was remodeled as a movie theater. In 1952 with the showing of The Outlaw, the Opera House was closed as a movie theater. By 1959, there was talk about tearing it down, but a public outcry stopped the wrecking ball. In 1969, the Western North Carolina Historical Society promoted the preservation of the playhouse, as did several other community groups. In 1970, the building was placed on the National Register of Historic Places.

Since that time, the WNCP has been used primarily as a venue for traditional professional theatre. In the year 2003, the mission of the WNCP was changed to emphasize avant-garde plays. Other area playhouses were focusing on more traditional plays and the WNCP Board thought that the change in emphasis would set the playhouse apart from the others. The Board plans to implement the new play genre in its schedule for 2005.

PLANNED RENOVATION

The WNCP Board is currently in the process of planning a renovation of the building. The renovation is expected to be completed by the end of 2007. The total cost of the renovation will be approximately $5,000,000. The Board expects to incur construction costs of $1million in 2005, $3 million in 2006, and $2 million in 2007. The Board is in the process of arranging a line of credit to finance the renovation. The Board expects that $1 million will be drawn from the line of credit at the beginning of 2005; $3 million at the beginning of 2006; and $2 million at the beginning of 2007. Principal repayments are expected to be $500,000 per year and paid at the end of each year beginning in 2005. Interest payments of 6% per annum will be paid on the outstanding loan balance at the end of each year beginning in 2005.

The planned renovation will return the building to its former glory and transform the interior to a full featured, professional, and engaging center for the arts and the community. A renowned architectural firm has been hired to develop the drawings. Experienced theater consultants were used to recommend design features to maximize the quality of the theater's acoustics, comfort and esthetics.

The restored structure will marry historical accuracy with a state-of-the-art performance space ideal for internationally recognized performers and the regional audiences they will attract. The facility will include spacious public areas and support spaces and will be completely accessible to all patrons.

The building's electrical, plumbing, and heating and air conditioning systems will be replaced, and state-of-the-art lighting and sound systems will be installed. Restoration will include a 10,000 square foot addition to house a new loading dock, an elevator, a second stage for rehearsal, and dressing rooms. The improvements for the building will incorporate full accessibility and an assisted hearing and TDD capability.

The building design includes acoustic isolation and shaping of the performance space, and a space conditioning system that is virtually silent. Oversized doors and corridors provide for the easy flow of patron traffic and for movement of instruments and set pieces.

The renovation work will be scheduled such that the ongoing usage of the facility will not be adversely affected. Thus, the Board of WNCP is planning to offer the normal number of plays during the theatre season which runs from May until October. During that period, the WNCP normally schedules 150 evening performances. Matinee performances may be added in the early afternoon hours preceding the evening performances.

THEATRE TRENDS

The administrative staff of the WNCP gathered theatre trend data from regional theatres for the past five years, from 2000-2004. The data are presented, as follows:

* Attendance increased by about 4%

* Outside contributions increased by about 3%

* The average theatre derived about 53% of its revenues from performances and about 47% from contribution

* Average ticket prices were about $20

* The average theatre sold about 75% of its playhouse capacity per performance

* Revenues from concessions and advertising in the playbills were about 5% of ticket revenues

* Outside contributors consisted of:

* Government 10%

* Corporations 15%

* Foundations 20%

* Individuals 40%

* Others 15%

The average theatre incurred expenses, as follows:

* Artistic 40%

* Technical 35%

* Administrative 25%

In the past, the WNCP operations closely resembled the trend data compiled above. However, due to the changes in the emphasis of its play genre, the WNCP Board developed the following set of assumptions regarding the operation of the playhouse over the next three years, 2005-2007:

* Outside contributions are expected to be about 40% of revenues

* Average ticket prices for evening performances are expected to be about $21

* Average attendance is expected to increase by about 5% over the three year period

* Ticket sales are expected to average about 81% of the playhouse capacity per performance

The expense breakdown is expected to be, as follows:

* Artistic 50%

* Technical 30%

* Administrative 20%

In order to achieve its objectives, the WNCP Board has entered into negotiations with a number of talent agencies to secure top name actors to appear in the plays that will be performed over the next three year period. The Board expects that offering trendy and modern plays with top talent will generate the increase in revenues necessary to offset the loss in outside contributions and the increase in artistic costs. Thus, artistic costs are expected to be a higher percentage of total costs. It is expected that the costs for technical and administrative will not change, but will be a smaller percentage of the total.

THREE-YEAR PLANNING DATA, 2005-2007

Performance revenue:

The WNCP auditorium has 1000 seats with four sections, AAA, AA, A, and B.

The number of seats and the normal ticket price for each of the four sections is, as follows:

* AAA 100 seats $40 per ticket

* AA 200 seats $30 per ticket

* A 400 seats $20 per ticket

* B 300 seats $10 per ticket

The auditorium is configured below:

If matinee performances are scheduled, normal ticket prices are reduced by $5 per ticket and are expected to generate about 50% of the expected attendance of the evening performance. Matinee performances are expected to have little or no effect on the attendance of the evening performances.

Each play that is considered for performance is given a category rating to indicate the level of attendance the play is expected to generate over a relevant range of performances. Because the WNCP wants to offer a wide variety of plays each season, the schedule will include plays from each category with a minimum number of offerings of 5 evening performances per play per year and a maximum of 20 evening performances per play per year. Each year WNCP will offer a total of ten plays: two plays from category 1, three from category 2, three from category 3, and two from category 4. The administrative staff of the WNCP has developed the following category chart for each evening performance of a play in that category:

Category Section % of Capacity

1 AAA 95%
 AA 95%
 A 95%
 B 95%
2 AAA 90%
 AA 85%
 A 85%
 B 80%
3 AAA 85%
 AA 80%
 A 75%
 B 75%
4 AAA 80%
 AA 75%
 A 65%
 B 65%

Outside Contributors:

In the past, WNCP has received most of its outside contributions from two sources, individuals and corporations. Normally, WNCP has required at least $1 million per year in outside contributions, 60% from individuals and 40% from corporate sponsors.

WNCP has developed and used a plan for obtaining individual contributions that has proved effective. The plan involves providing tickets to the contributors that can be used for any performance and the contributors are recognized in the season's playbill. There are five different categories of contributors, which are, as follows:

Stars $5,000+ 12 tickets in section AAA
Angels $3,000 8 tickets in section AAA
Benefactors $2,000 6 tickets in section AA
Supporters $1,000 6 tickets in section A
Sustainers $ 500 6 tickets in section B

As in prior years, it is expected that WNCP will have 20 Stars contributing an average of $6,000 each, 40 Angels contributing $3,000 each, 60 Benefactors contributing $2,000 each, 100 Supporters contributing $1,000 each, and 300 sustainers contributing $500 each.

WNCP has a number of loyal corporate sponsors to underwrite a part of the cost for each of the ten plays offered each season. These sponsorships are $40,000 per play and provide WNCP with $400,000 per year. The corporate sponsor receives a block of 8 section AAA tickets to each performance of the play being sponsored and major recognition by WNCP.

Cost Behavior

The administrative staff compiled data on the expected cost to produce an "average" play at the WNCP over the next three years, 2005-2007. One of the problems encountered by the staff is that there is no such thing as an "average" play and every play is quite different from every other one. Much depends on the number of performances and how many actors are hired. Typically, a medium-sized (6 actors, 20 performances) play's fixed production costs will be about $350,000. That includes directors and other production staff salaries, scenery, costumes, lights, and sound. In addition, each play has variable costs per performance that include salaries for top name actors and supporting cast, obtaining the rights for the play, and orchestra fees. The variable cost per performance and the fixed production cost for each play are expected to fall into the same four category ratings used to determine ticket sales.

The administrative staff has compiled a chart showing the variable cost per performance and the fixed production cost for each play by category rating, as shown in Table 1.

PLAYS UNDER CONSIDERATION

The WNCP Board is considering thirty plays for the three year period, 2005-2007. Ten different plays will be scheduled each year. As mentioned before, each year's season runs for 150 days and evening performances will be scheduled for each of those days. Matinee performances can be scheduled preceding any evening performance if economically feasible. The plays are under consideration are displayed in Table 2.

The WNCP Board has asked your consulting firm to assist them in preparing the three- year planning report, 2005-2007. The Board has suggested the following format for the report:

Executive Summary

Cost/Volume/Profit Analysis 1. Spreadsheet showing revenues, variable costs, and contribution margin per evening and potential matinee performance for each play

2. Recommended schedule of plays per year that will maximize cash flows and satisfy constraints established by the WNCP Board

3. Number of performances of each play required to cover the play's direct fixed costs.

4. Amount of money that must be raised from outside contributors to cover the projected deficits for each year.

A Year by Year Cash Flow Budget (include outside contributions from individuals and corporate sponsors)

Summary of Recommendations

Special Issues

1. How would the recommendations change if, in a worst case scenario, the forecasted attendance was 80% of the original forecast?

2. What if the top name actors are paid one-fourth of the stated salaries plus 1% of the proceeds from ticket sales? Would this be a better deal for the WNCP? The actors? Support conclusions with detailed analyses.

3. What means of raising outside contributions could the playhouse pursue? Develop a detailed plan.

Philip L. Little, Western Carolina University

Beverly L. Little, Western Carolina University

Table 1: Variable Cost per Performance

 Category

Variable Costs per 1 2 3 4
 Performance
 Salaries Top Actors:
 Maximum Number 3 2 1 1
 Salary Per Performance $3,000 $3,000 $3,000 $1,500
 Salaries Supporting $100 $100 $100 $100
 Actors
 Obtain Rights $120 $80 $60 $40
 Orchestra Fees $200 $200 $150 $100

 Category

Fixed Costs per 1 2 3 4
 Performance
Fixed Production $500,000 $300,000 $200,000 $100,000
 Costs Per Play:
All Other Fixed Costs: $60,0000
 per year

Table 2: Plays Under Consideration

Play Genre # Actors Category

Bay at the Moon Comedy 6 1
Beat Comedy 2 1
Beautiful Woman Comedy 5 1
Bill of Rights Drama 3 1
Admissions Comedy 8 1
The Bill Show Comedy 9 1
The Box Drama 7 2
The Brightest Light Comedy/Drama 20 2
Cairo Drama 11 2
Captain 11 Drama 12 2
Cat and Mouse Comedy 4 2
Chitterling Heights Drama/Comedy 8 2
Christmasless Comedy 6 2
Circumference Drama 2 2
Counsellor Adams Drama 9 2
Hate Mail Comedy 8 3
Hell to Pay Farce 7 3
The Hidden Place Drama 5 3
A Hole in the Dark Drama 10 3
A House of Cards Drama 4 3
Dreaming of Norton Comedy/Drama 6 3
Eastwest Drama 2 3
Eighteen Drama 6 3
Evergreen Comedy/Drama 9 3
Heights Comedy/Drama 9 4
The Coyote Bleeds Comedy 4 4
Cupid & Psyche Drama/Comedy 2 4
Dangerous Fantasy/Drama 10 4
Debt Drama 6 4
The Desk Drama 8 4