To: The Alltel Pavilion Management
Subject: The Alltel Pavilion Strategy and CVP Analysis
In this memo, we use CVP analysis to explore strategy for negotiating with different types of artists and for realizing the business target under various conditions. The ALLTEL Pavilion in North Carolina is an outdoor amphitheater that provides about 40 concerts to the public per year. The past operating period shows negative results. The management’s aim is to forge a better strategy to realize their goals in terms of their budget and sign contracts with different artists. Although the financial goal is to create profit, we need to calculate the breakeven point to get started. Exhibit 1 is the input table for a fixed-fee show, the KFBS Allstars. We list the show’s revenues and costs, and identify cost behavior based on the following assumptions:
-We have categorized costs into three types: other direct costs, operating expenses and variable costs. Under other direct costs, the parking contract, concession contract and merchandise contract are mixed costs because they consist of 10% of revenue and fixed fee. Production, operations and advertising expenses are fixed costs for a season. -We assume that the number of comp tickets is 25% of the number of paying tickets. So Alltel can achieve positive profit under the sales volume if the comp ticket portion is lower than 25% of the number of paying tickets. -Every ticket holder will attend the show, meaning Alltel can realize both ticket related revenue and ancillary revenue. In order to calculate the break-even volume, we should first categorize the customers into paying customers and comp customers. Exhibit 2 depicts the mixed costs, fixed costs and variable costs, in quantitative terms. Exhibit 3 illustrates contribution margin of the two types of customers. If we consider that the number of paying customers is Q, by calculating the following equation:...