How does outfitting AMC Movie theaters with recliners affect

How does outfitting AMC Movie theaters with recliners affect the companus breakeven point and operating leverage?

AMC Entertainment Holdings Inc. is spending millions of dollars to install recliner-seating in its theaters .AMC Entertainment Holdings Inc. is outfitting about 1,800 of its nearly 3,000 auditoriums with recliners for a total cost of about $600 million. The recliners will remove up to two-thirds of the

seating capacity in each theater, due to the fact that the recliners fully recline (think La-Z-Boy). The cost per auditorium is about $350,000 to $500,000 with some of the costs being paid by the landlords.

At AMC theaters where the new seating has been installed, movie ticket sales have increased by up to 80%. AMC plans to keep ticket prices at the current price for the first year that the new seating is installed. After the first year, then ticket prices will be increased by $1 to $2 per ticket.

Questions

1. How would the costs of the recliners and installation within a given theater affect that

theater’s break even point? Explain.

2. Would the 80% increase in ticket sales in a recliner-outfitted theater affect the theater’s break

even point? Explain why or why not.

3. How would the $1 to $2 increase in the price of a movie theater ticket after a year impactbreak even? Explain.

4. How does the installation of these recliners impact the company’s operating leverage? Does the company have more or less risk with the new cost structure? Explain.

Solution

1. As we know that the break even point is calculated by dividing Fixed costs by the contribution Margin. Any increase in the contribution margin will have an opposite effect on the break even and a decrease in the contribution margin will increase the point of break even where the firm is able to cover its investments and the situation would be called a no profit no loss.

2. An increase in the sales price by 80 percent means that the sales revenue will go up. We also know that contribution margin is calculated by subtracting variable costs means that an increase in the sales revenue will increase the contribution margin and the firm will reach the break even faster than earlier.