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Questions Covered in the Solution:
1. Was Forrest Gump an “accounting” hit in terms of net income, as computed by Paramount?
2. In their original contracts, actor Tom Hanks and director Robert Zemeckis were to receive $7 million and $5 million, respectively, for their work on Forrest Gump. However, after the studio asked the producers for budget cuts, both Hanks and Zemeckis agreed to forego their standard fee for a percentage of the film’s gross box office receipts. Sources estimate that the new agreement guaranteed each of the two 8% of the studio’s share of gross box office receipts from the film. Using the information available about the costs of making the film, did Forrest Gump have a positive contribution margin? Assume that all costs not specifically identified as variable are fixed.
Sample of Solution:
Q 1. Was Forrest Gump an ‘accounting’ hit in terms of net income, as computed by Paramount?
The movie “Forrest Gump” was although a significant hit on its own while clinching Oscars in all of its 13 nomination categories. But whether it was a financial success or not depends on its returns on the invested capital. Hence, financial analysis, incorporating net income in conjunction with the direct, indirect, variable, fixed and concerned overhead costs, is required to evaluate the financial aspect of Forrest Gump. Furthermore, financial reporting standard used by Paramount is also determinant to the net income generated from the movie Forrest Gump. Hence, for an extensive profitability analysis of this movie, financial income statement has been formulated (Figure 1).