GSM 5301 – COST BEHAVIOUR - FORREST GUMP versus SIVAJI
Forrest Gump was one of Paramount’s biggest hit movies of 1994. In 1995 it was nominated for 13 categories of the Oscar awards and it won six including best picture, best director and best actor awards. One analyst estimated that the film could generate as much as $350 million cash flow for Viacom, Inc., Paramount’ parent company. The film took nine years to make it to the big screen and the script was then thought as unlikely material for a runway hit movie.
Films are typically distributed to cinemas under an agreement whereby gross box office receipts are split approximately 50/50 between the cinemas and the movie studio. Based on such an agreement, Paramount had received $191 million in gross box office receipts from the cinemas as of December 31 1994. Paramount reports that the film cost $112 million to produce, including approximately $15.3 million each paid to Tom Hanks and director Robert Zemeckis, and “production overhead” of $14.6 million. This production overhead is charged to the movie at a rate equal to 15% of other production costs.
Not included in the $112 million production costs were the following expenses associated with the film. Promotion expenses incurred to advertise, premiere, screen, transport and store the film totaled $67 million at the end of 1994. An additional $6.7 million ‘advertising overhead charge’ (10% of the $67 million promotion expenses) was charged to the film by Paramount. These charges represent the film’s allocation of the studio’s costs of maintaining an in-house advertising department. Paramount also charged the film a ‘distribution fee’ of 32% of its share of gross box office receipts. This fee is the film’s allocation of the costs incurred by Paramount to maintain its studio-wide distribution services. Finally $6 million interest on the $112 million in production costs was charged to the film by Paramount.
Another successful film is Sivaji, the most...
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