The film's plot concerns four Midwestern teenagers who become trapped in a dark ride at a traveling carnival and are stalked by a mentally disabled murderous carnie.

A Universal Pictures production, The Funhouse was director Hooper's first major studio film after The Texas Chain Saw Massacre (1974) and Eaten Alive (1976).

The attacker turns out to be her younger brother Joey, a horror film fan, and his weapon is a fake rubber prop knife.

Through a grate to a room below the attraction, the teenagers witness the ride assistant, a silent man in a Frankenstein's Monster mask, engaging Zena as a prostitute.

Gunther's face is revealed to be gruesomely deformed via albinism and frontonasal dysplasia with sharp protruding teeth, long white thinning hair, red eyes, and a cleft running up the bridge of his nose.

As dawn breaks, the traumatized sole survivor Amy emerges from the funhouse and heads home as the animatronic fat lady perched atop the entrance laughs mockingly at her.

[5] Williams further posits that the "carnival world" which Amy enters acts as a liberating, unrepressed counter to the restricted nature of her home life with her family.

[8] In the 2021 book American Twilight: The Cinema of Tobe Hooper, writers Kristopher Woofter and Will Dodson note a recurring theme throughout The Funhouse of a world in which adults mistreat and look down upon teenagers, characterizing them as "a corrupt cabal disenfranchising the young.

"[9] The Funhouse was written by Larry Block, and the script was purchased by Universal Pictures, who were looking to produce a teen-aimed horror film after the success of Paramount's Friday the 13th (1980).

[12] Elizabeth Berridge, who was cast in the lead role of Amy Harper, is given an "introducing" credit, though she had previously appeared in the film Natural Enemies (1979).

[13] Largo Woodruff was cast in the role of Amy's best friend, Liz, after auditioning and screen testing for the part with Hooper in New York City.

"[15] Though set in the American Midwest in Iowa,[16] The Funhouse was shot on the backlots of the Ivan Tors Studios in Miami, Florida,[17] over approximately ten weeks.

"[18] The production originally intended to shoot the film on the Universal Studios lots, but opted instead to film on the east coast, as they were unable to obtain a waiver in the state of California allowing for child actor Shawn Carson—who played a significant role in the film—to work overnight due to child labor laws.

[24] Additionally, Reardon designed Twibunt's brother, a preserved infant exhibiting similar facial deformities seen on display at the carnival in the film.

[a] [30] Following its theatrical release, an alternate cut of the film was aired on network television which featured additional footage to supplant the scenes of violence and nudity that had to be excised, as well as to pad the running time.

[37] A 4K Ultra HD Blu-ray edition featuring newly conducted interviews with cast and crew members was released by Scream Factory on September 12, 2022.

[40] Tobe Hooper was specifically praised for bringing style and suspense to what could have been a standard early-1980s blood and gore-focused horror film, and his work here was largely responsible for him getting the job of directing the original Poltergeist movie.

[41] He also cited it as one of his "guilty pleasures" in a 1987 show, giving the film credit for having an interesting story, creative direction, and even a somewhat sympathetic villain.

"[42] Variety's review of the film was similarly mixed: "For all the elegance of photography, [the] pic has nothing in particular up its sleeves, and devotees of director Tobe Hooper’s The Texas Chain Saw Massacre will be particularly disappointed with the almost total lack of shocks and mayhem.

"[43] In a review published in People, the film was praised: "While the director, Tobe (The Texas Chainsaw Massacre) Hooper, ought to have moved on to better things, he is the master of this gore-and-sadism genre...

In little ways and using the traditional tried and true devices of the genre ... it skillfully heightens expectations [and] nicely evokes the chiller of a bygone era as it pays respect to Hitchcock and James Whale.