Main Line vs Basinger

Topics: Costs, Variable cost, Management accounting Pages: 7 (2263 words) Published: September 9, 2012
Cheryl E. Carter
Module 3 Case Assignment
ACC501 - Accounting for Decision Making
Dr. Mary Dereshiwsky
Due: 22 February 2010
25 June 2010

Main Line vs. Basinger
In discovering accounting principles, there is discerning concepts that are not accounted for in regards to relevant cost. In 1991, the case of Main Line Pictures, Inc. verses actress Kim Basinger for breach of contract, the controversy with negotiations between Basinger and Main Line Pictures is an excellent example of the importance for accurate cost-profit decision making. Main Line had a verbal contract with Actress Kim Basinger to star in the film, "Boxing Helena" but had withdrawn from the project. The suit was heard in early 1993 in the Superior Court of the State of California, for the County of Los Angeles. The analysis of plaintiff and defendants’ arguments showcased in this suit indicates that regardless of the business, understanding and documenting the affects of decisions are in terms of costs and profits. The amount of Main Line’s loss can never be determined with pinpoint accuracy, since they did not properly utilize statement of financial accounting standards (SFAS 1981) and Main Line would not have made the profit that they indicate they would have. Main Line’s maximum and minimum lost profit amounts should not be revised downward for both domestic distribution and foreign pre-sales for the film, simply because they were sunk costs regardless if they made the film or not. The domestic distribution revenues of $3 million were an estimate future cost but the deal had not been finalized at the time Basinger withdrew from the contract. Likewise, the foreign pre-sales were not relevant because, these cost were an approximation based on the future cash flows from minimum and maximum profit loss from domestic distribution would have been made regardless of whether Bassinger starred in the film or not, because they were needed to secure financial backing from banking institutions to initiate the project in the first place. These costs also could have been adjusted, again because the deal had not been finalized; therefore the $800,000 of foreign pre-sales was not actual costs but a reasonable estimate of cash flow from future potential contracts which is irrelevant in this instance. The bottom line is that movie producers have to be able to predict future cash flows prior to a movie is even released, in order to be able to determine whether it is worth obtaining “credit” for movies, since they need to be able to pay that money back to their lenders. If Basinger did not fully contract to the film, the loss of $2.1 million is an alternative cost, and Basinger would not be responsible for the loss. So when Sherilyn Fenn was starred in the film, the anticipated loss should have been adjusted for the alternative cost incurred for Fenn. "Without Basinger" the film’s alternative cost should be adjusted down from Main Line's maximum and minimum lost profit amounts "because he has a duty under the law to minimize his loss, and it does not include going out and making a picture knowing you are $2 million short." (Barton, Shenkir, & Marinas, 1996) If Basinger is to be held to her verbal contract, then adjusted costs based on an alternative cost analysis would make Basinger liable for the difference in revenues losses incurred by Main Line, which would not be $2.1 million. Main Line had three options in this case. To decide to hold Basinger to contract, to star an alternate actress and thirdly to terminate or delay the production of the film; regardless of any option pursued, Main Line has the responsibility to accurately account for all costs to make a sound and profitable decision. It is reasonable to presume Main Line would not produce a film that would not make a sound profit based on a projected budget where Fenn was originally casted in the film. This business sense justifies the inappropriateness...
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