Changing Fixed Costs to Variable Costs at Blockbuster Video
According to an article in Business Week, when John F. Antioco took charge of Blockbuster Video, he changed the company's strategy. Traditionally, Blockbuster had bought videotapes from the move studios for an average cost of about $65 each, planning to rent them out often enough to make a profit.
Mr. Antioco replaced this strategy with one that allows Blockbuster to purchase videos for an average of $7 per tape and pay the studio 40% of any rental fee received for the tape. With this arrangement, Blockbuster could afford to stock more copies of each tape and guarantee customers that the tape they want will be in stock?or the rental is free. Suppose that Blockbuster rents videotapes for $2.00 a day. Assume that operating costs are all fixed.
1. Under the traditional strategy, how many days must each tape be rented before Blockbuster will break even on the tape?
2. Under the new strategy, how many days must each tape be rented before Blockbuster will break even on the tape?
3. Suppose customers rented a particular copy of Chicago for 50 days. What profit would Blockbuster make on rentals of the tape (considering only the direct costs of the tape, not the costs of operating the rental store) under the traditional strategy? Under the new strategy?
4. Suppose customers rented a particular copy of About Schmidt for only six days. What profit would Blockbuster make on rentals of the tape (considering only the direct costs of the tape, not the costs of operating the rental store) under the traditional strategy? Under the new strategy?
5. Comment on how the new arrangement affects the risks Blockbuster accepts when purchasing an additional copy of a particular videotape.