Is it more profitable to sell your product for $50 or $15? This is a difficult question for many movie studio executives. Consider a movie that cost $60 million to produce and required another $40 million to promote. After its theatre release, the studio must determine whether to sell DVDs directly to the public at a wholesale price of about $15 per DVD or to sell to video rental store distributors for about $50 per DVD. The distributors will then sell to about 14,000 video rental stores in North America.
Assume that the variable cost to produce and ship one DVD is $3.00.
1. Suppose each video rental store would purchase 10 DVDs of this movie. How many DVDs would need to be sold directly to customers to make direct sales a more profitable option than sales to video store distributors?
2. How does the cost of producing and promoting the movie affect this decision?
3. Walt Disney Co. elected to sell The Lion King directly to consumers, and it sold 30 million copies at an average price of $15.40 per DVD. How many DVDs would each video rental store have to purchase to provide Disney as much profit as the company received from direct sales? Assume that Disney would receive $50 per DVD from the distributors.
