Question: Changing Fixed Costs to Variable Costs at Blockbuster Video When John F. Antioco took charge of Blockbuster Video , he changed the company's strategy. Traditionally, Blockbuster had bought videos from the movie 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 each and pay the studio 40% of any rental fee received. With this arrangement, Blockbuster can afford to stock more copies of each video and guarantee customers that the movie they want will be in stock-or the rental is free. Suppose that Blockbuster rents videos for $2 a day. In each of the following questions, consider only the direct costs of the videos, not the costs of operating the rental store.
1. Under the traditional strategy, how many days must each video be rented before Blockbuster will break even on the video?
2. Under the new strategy, how many days must each video be rented before Blockbuster will break even on the video?
3. Suppose customers rented a particular copy of Moneyball for 50 days. What profit would Blockbuster make on rentals under the traditional strategy? Under the new strategy?
4. Suppose customers rented a particular copy of The Descendants for only 6 days. What profit would Blockbuster make on rentals 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 video.