A cable television network is considering cancelling the program Toronto Lawyer because it is watched by only 2.3 percent of the audience in its Monday evening time slot. It would be replaced by Gone, a new show being created from the same formula as the popular Lost. Market research indicates that Gone would be watched by 4 percent of the audience in the same time slot. For audiences between 1.5 percent and 5 percent, the network believes each 1 percent of the audience in this time slot results in additional advertising revenue of $40,000 per week (including beneficial effects on other programs, both present and future). Replacement would come halfway through the 30-week season.
Developmental expenses for Toronto Lawyer were $600,000, and these are being depreciated over the originally projected complete season (30 programs).
Developmental expenses for Gone were $900,000. If Gone is shown for the second half of this season, the entire development cost must be depreciated over those 15 programs. If it is not aired until next season, depreciation will take place over 30 programs.
The cost of a script for one program of Toronto Lawyer is $20,000 and for Gone, $24,000. No contract for scripts for Gone has yet been signed, but a contract for 20 programs of Toronto Lawyer was signed and the $400,000 was already paid.
The star of Toronto Lawyer is under contract to the network for the entire season at $240,000. If Toronto Lawyer is cancelled, the star will do one special in the spring; if Toronto Lawyer continues, he will not do the special. If the star does not do the special, another person (with completely equivalent audience appeal) will be hired for $40,000 to do the special.
The star of Gone has been hired for the next season for $180,000. If she does 15 shows this season, she will have to forgo a part in a movie. Consequently, she must be paid $120,000 for 15 shows this season.
Investment in the set for Toronto Lawyer was $100,000, which was immediately expensed. Additional expense for the set averages $10,000 per show. If Toronto Lawyer is cancelled, the set can be sold for $20,000. Another alternative use of the set is for a TV movie that the network is planning. Additional set expenses for the movie would be $50,000, but building a completely new set would cost $80,000.
Gone is filmed on location; thus, there is no investment required for a set. However, $20,000 per show is required to make the location suitable for filming.
The production crew of Toronto Lawyer (including actors other than the star) receive $50,000 per show. Most of these people could be used profitably in other operations at the network. However, two actors must be fired if the show is cancelled, and the actors union requires severance pay of $4,000 each.
There will be a large startup cost of production for Gone because of suddenly needing it six months ahead of schedule. This will amount to $150,000, only $60,000 of which would be necessary if it were not aired until next season. The production crew is very important to Gone, and they receive $80,000 per show.
The network allocates corporate overhead to each show by a complex formula. Each program of Toronto Lawyer was allocated $20,000 of overhead; each program of Gone will be allocated $30,000 of overhead. The only corporate overhead expense that would change if Gone replaced Toronto Lawyer is the consultation time that corporate management spends with the production staff. This averages 10 percent of the total production crew expense.
This decision is to be made by top management, who will invest about $20,000 of their time and effort in it. In addition, a consultant will be paid $4,000 to review the decision.
Should the network cancel Toronto Lawyer and replace it with Gone immediately? Explain. Be sure to describe the information that was relevant to this decision and compute the monetary advantage or disadvantage to switching from Toronto Lawyer to Gone.
