Sales volume to multiply against its per unit

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sales volume to multiply against it’s per unit contribution margin to cover all its fixed costs. Each lost sale it looses is lost contribution margin to apply to its fixed costs. If the firm wants to trade off potential profitability for security, it will push more of its cost away from fixed and assume more variable costs within its cost structure. In this case, it would move away from paying a direct fee to its performers, but would rather have them work on a commission basis – get a fixed percentage of the ticket revenue that comes in. An alternative would be to have a graduated percentage involved – more sales provide a higher percentage. The concessions have a fixed component cost (90%) and a variable component cost in that the vendor gets 10% of his own revenue. They could increase this percentage if they want to assume less risk and less return. The concession will be correlated directly to the overall ticket revenue, so it has a compounding effect. The other consideration is that there are a lot of fixed costs built into the operation automatically – maintenance of grounds, property tax, etc. Therefore, the firm loses if it doesn’t sell out all the seats because they have unused/excess capacity. If they can lower the price it may be good because ROI is equal to turnover x margin. If they oversell capacity seating they could offer free tickets for another show. Also, they could use congestion pricing or weekday seats that cost less than weekend. These are all relevant costs/revenue that can change across alternatives. The firm must choose the means to maximize profitability over the long term. It would need to use CVP analysis and operating leverage to determine what they want to assign to a performer. It depends how much risk they want to assume. Risk and financial return have a direct relationship. The more fixed costs that are built into the contract (i.e. paying a performer a fixed fee regardless of the attendance they bring in), give ALLTEL Pavilion more operating leverage.
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Once the fixed costs are met, all revenues brought in above their related variable costs will increase the absolute dollar amount of the contribution margin. 6

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