Starlight Cinema: lift ticket prices or take the council grant?
Starlight Cinema seats 220 people and currently charges $12 a ticket. Average monthly attendance is 4,000. A local competitor and streaming services have been reducing audiences. The owner is considering raising the ticket price to $15.
At $12, monthly ticket revenue is $48,000. Concession sales average $6 per attendee, with a 60% gross margin. Variable costs are $2.50 per attendee. Monthly fixed costs are $28,000. Market research suggests that at $15, attendance would fall to 3,400 a month.
The council offers a $10,000 monthly grant if the cinema keeps a $10 student ticket and runs two community screenings a month. Those screenings would cost $1,200 a month and use 8 staff hours. The owner wants to keep the cinema open and protect jobs, but also needs at least $4,000 monthly profit to service a loan. There is no other cinema within 45 minutes.
1. Calculate monthly profit at $12 and at $15. Show ticket revenue, concession contribution, variable costs, and fixed costs. Which price produces higher profit?
Read the worked answer
At $12: Ticket revenue = 4,000 × $12 = $48,000. Concession contribution = 4,000 × $6 × 60% = $14,400. Variable cost = 4,000 × $2.50 = $10,000. Fixed cost = $28,000. Profit = 48,000 + 14,400 − 10,000 − 28,000 = $24,400.
At $15: Attendance = 3,400. Ticket revenue = 3,400 × $15 = $51,000. Concession contribution = 3,400 × $6 × 60% = $12,240. Variable cost = 3,400 × $2.50 = $8,500. Fixed cost = $28,000. Profit = 51,000 + 12,240 − 8,500 − 28,000 = $26,740.
The $15 price gives $2,340 more monthly profit, even though 600 fewer people attend. Ticket revenue rises by $3,000, concession contribution falls by $2,160, and variable cost falls by $1,500. Net effect = +3,000 − 2,160 + 1,500 = +$2,340.
2. Calculate the price elasticity of demand between $12 and $15 using the simple percentage-change method. Interpret the result and explain one limitation of using it for this decision.
Read the worked answer
% change in quantity = (3,400 − 4,000) ÷ 4,000 × 100 = −15%. % change in price = (15 − 12) ÷ 12 × 100 = +25%. Price elasticity of demand = −15% ÷ 25% = −0.6. Taking absolute value, 0.6 < 1, so demand is inelastic over this range: attendance falls proportionally less than the price rises. That is why ticket revenue rises from $48,000 to $51,000.
Limitation: elasticity is estimated from market research, not actual sales, and it ignores concession spending. The 15% attendance fall is an assumption. If the true fall were larger, profit could be lower. Also, the survey says 30% would switch if price rose above $16; at $15 the cinema may be close to a threshold, so a further rise could be much more elastic.
3. Evaluate the council grant option. Recommend a pricing and grant strategy that meets the $4,000 monthly profit requirement and supports community access. Justify your answer.
Read the worked answer
At $12, base profit is $24,400. With the grant: $24,400 + $10,000 − $1,200 screening cost = $33,200. At $15, base profit is $26,740. With grant: $26,740 + $10,000 − $1,200 = $35,540. Both easily exceed the $4,000 loan-service requirement. The $15-with-grant option is highest, but it raises the adult price while accepting public money intended to support access; that is a reputational risk if the council expects affordability.
Recommended strategy: keep the adult price at $12 for at least six months, introduce the $10 student ticket, and apply for the grant. Profit is about $33,200, leaving a large margin above $4,000. Use part of the grant to fund two community screenings and to advertise. After six months, review attendance and concession sales. If the grant is not renewed, the cinema can move to $15, which still yields $26,740 - well above the loan requirement. This staged approach protects access now, tests demand, and keeps a fallback.
If the council grant were only one-off, do not build it into the ongoing budget. Treat it as a cushion, not core revenue.