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.