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Pricing ^^<^^>^^^^^ 185
when a picture is offered, the distributor should make every effort first of all to secure sufficient revenue to meet the costs of the picture. Having met the costs, he then continues his efforts in order to make as large a profit as possible. In other words, each individual sale is frankly not made on a basis of cost plus. Early sales nre made to recoup the costs incurred. Subsequent sales return the profit.
In the case of many very small theaters, the price paid for a film may not exceed $7.50 or $10. It is quite probable that this figure does not cover the cost of distribution on that film plus a reasonable contribution toward production costs. However, the acceptance of this price is based on the assumption that it does cover the direct cost of sale and physical distribution with something left over. This excess is considered to be an addition to the net profit in the event that all production costs have been met by rentals obtained from earlier showings. Any rental figure which more than covers the actual selling cost (which is ordinarily shared by other pictures sold at the same time) and actual physical distribution is, therefore, commonly considered worth accepting. This is the position taken by practically everyone in the industry. Relative to it, Montgomery says, in discussing depreciation rates:5
Negatives last indefinitely, but their value in use expires with the demand for the positives printed from them. The larger producers plot curves on the drawing power of each picture and so estimate its probable life and earning power. From these data they are prepared to reckon the lessening value of negatives.
In certain circumstances, as, for example, when a producer makes only one picture over a considerable period, which calls for a large expenditure, the speculative nature of the undertaking would warrant the application of all revenues against the cost of the picture until the cost is fully extinguished before any net income is considered to have been realized. The thought has been advanced that if such an enterprise were on a cash, rather than accrual basis, the expenditures of a given period for a new picture might well be applied against the cash receipts of the same period even though the latter were from
5 Auditing Theory and Practice by R. H. Montgomery, pp. 739.740. (The Ronald Press Company, New York, 1927.)