Relevant Information for Decision Making

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Relevant Information for Decision Making

1) Should Main Line’s maximum and minimum lost profit amounts be revised downward for the following? Why?
a. The domestic distribution revenues of $3 million because the deal had not been finalized.

There is no legality in revising the maximum and minimum lost profits based on the distribution revenues of $3 million. This is because the above figure was an estimate of future cash flow. The distribution revenues were mere approximations and thus do not count even in the event of the finalization of the deal. The above amount should only be kept for consideration but not for the calculation of the minimum and maximum profit lost (Barton, William & Brian, 1996).

b. The $800,000 of foreign pre-sales because they were “probable” not actual.

The maximum and minimum lost profits should not be modified based on the $800,000 of foreign pre-sales. This is because the above figure is not the actual figure incurred but an estimate of the future cash flow that was based on foreign sales.

c. The loss of $2.1 million on the “Without Basinger” film.

It is indeed right for the company to revise downwards from Main Line’s maximum and minimum lost profit amounts the $2.1 million loss on the “Without Basinger” film. The underlying reason behind this is the legal obligation to minimize the loss. This however, does not entail going to the limits of starting a movie project with the prior knowledge of being $2 million short. This gives reasonable proof that Main Line should not have considered starting a movie that they probably knew would make a loss in the end. With this in mind, the calculation would be founded on the budgeted cost verses expected sales. On the same case, Basinger is not liable for the $2.1 million loss incurred for the “Without Basinger” film.

2) Are the following relevant to the determination of lost profits to Main Line? Why?
a. Basinger’s $3 million salary for “Final Analysis.”

The $3 million salary to Basinger’s role in “Final Analysis” does not seem relevant at all. Details indicate she was worth $3 million in salary but Main Line was able to sign her for only $1 million. This indicates that the $3 million was an opportunity cost for Basinger and Main Line ought not to consider this figure in their calculation of lost profits.

b. The comparison of revenues for Basinger films with revenues for Fenn films.

This comparison is not relevant in determining the lost profits to Main Line. Although past records indicate Kim Basinger has achieved more success than Sherilyn Fenn has in her acting careers, previous main and supporting roles are of no effect to the finances of this film (Lionel, 1998).

3) Is plaintiff’s expert correct in not attempting to estimate revenues for “Boxing Helena” beyond pre-sale amounts? Why?

The plaintiff’s expert is indeed correct in not making estimate revenues for “Boxing Helena” beyond pre-sale amounts. This is because additional amounts would not have been actual figures but assumptions.

4) Should Main Line’s lost profits be adjusted downward to include an estimate of domestic revenues for the “Without Basinger” film? Would it have been valid to use the $1.7 million advance against domestic revenues as the estimate? Explain.

It is correct to adjust Main Line’s lost profits downward to include an estimate of domestic revenues for the “Without Basinger” film. This is because as explained by the lawyer for Main Lines, the loss incurred is determined by calculating the compensation expense that would have been incurred in casting the original actor. The use of the $1.7 million advance against domestic revenues is invalid as the amount is immaterial to the Mainline – Basinger contract dispute.

5) Suppose Basinger had remained with the film and assume the $3 million profit shown in the plaintiff expert’s minimum damage calculation was correct. Is it reasonable to assume that Main Line’s pretax cash position would have increased by $3 million, or would some part of this have been paid to others? Why?

This would have been a wrong assumption as the total claims against the profits that are contractual in nature add up to $ 10.6 million whereas the actual ones were a meager $2.7 million in foreign pre-sale agreements (Albrecht, James, Earl, & Monte, 2007).

6) I agree with the jury’s lost profit assessment.

Reference

Albrecht, W., James D., Earl K., & Monte R. (2007). Accounting: Concepts and Applications. New York, NY: Cengage Learning.

Barton, L., Shenkir, William G, Marinas, Brian C. (1996). Instructional case – Main Line vs. Basinger: A case in relevant costs and incremental analysis Issues in Accounting Education. Sarasota: Spring publishers.

Lionel, S. (1998). Entertainment law reporter, Volume 20. New York, NY: Entertainment Law Reporter Pub.