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Forrest Gump: A Lesson on Cost Behavior

Charles E. Davis

Forrest Gump was one of the biggest movie hits of 1994. The movies fortunes continue to
climb in 1995, as it took home Oscars in six of the 13 categories in which it was nominated,
including best picture, best director and best actor. One analyst has estimated that the film
could generate cash flow as much as $350 million for Viacom, Inc., Paramount Pictures parent
company. Such success has insured the film a place among the top grossing films of all times.
This is quite an accomplishment for a movie that took nine years to make it to the big screen
and whose script was not considered material likely to guarantee a runaway hit movie.

But was Forrest Gump a money maker for Paramount in 1994? Films are typically distributed to
theaters under an agreement that splits the gross box office receipts approximately 50/50
between the theater and the movie studio. Under such an agreement, Paramount had received
$191 million in gross box office receipts from theaters as of December 31, 1994. Paramount
reports that the film cost $112 million to product, including approximately $15.3 million each
paid to star Tom Hanks and director Robert Zemeckis 1, and production overhead of $14.6
million. This production overhead is charged to the movie at a rate equal to 15% of other
production costs.

Not included in the $112 million production costs were the following other expenses associated
with the film:

Promotion expenses incurred to advertise, premiere, screen, transport, and store the
film totaled $67 million at the end of 1994.
An additional $6.7 million advertising overhead charge (equal to 10% of the $67
million promotion expenses) was charged to the film by Paramount. These charges
represent the films allocation of the studios cost of maintaining an in-house advertising
department.
Paramount also charged the film a distribution fee of 32% of its share of gross box
office receipts. This fee is the films allocation of the costs incurred by Paramount to
maintain its studio-wide distribution services.
Finally, $6 million in interest on the $112 million in production costs were charged to the film
by Paramount.

1
Hanks and Zemeckis have a contract with Paramount for 8% of Paramounts share of the film's gross box office
receipts.

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