Problem:
Text book publishers evaluate market size, degree competition, expected revenues, and costs for all prospective titles. With these data in mind, they estimate the probability that a given book will reach or exceed the breakeven point. If the publisher estimates that a book will not exceed the breakeven point based upon standard assumptions, they may consider cutting production costs by reducing the number of illustrations, doing only light copy editing, using a lower grade of paper, or negotiating with the author to reduce the royalty rate. To illustrate the process, consider the following data:
Cost Category Dollar Amount
Fixed Costs
Copyediting and other editorial costs 15,750
Illustrations 32,750
Typesetting 51,500
Total Fixed Costs 100,000
Variable Costs
Printing, binding and paper 22.50
Bookstore discounts 25.00
Sales staff commissions 8.25
Author royalties 10.00
General and administrative costs 26.25
Total Variable Costs per copy 92.00
List Price per copy 100.00
Fixed costs of $100,000 can be estimated quite accurately. Variable costs are linear and set by contract. List Prices are variable, but competition keeps prices within a narrow range. Variable costs for the proposed book are $92 a copy, and the expected wholesale price is $100. This means that each copy sold provides the publisher with an $8 profit contribution.
Q1. Estiamte the volume necessary to reach a breakeven level of output.
Q2. How many textbooks would have to be sold to generate a profit contribution of $20,000?
Q3. Calculate the economic profit contribution or loss resulting fromt he acceptance of a book club offer to buy 3,000 copies directly from the publisher at a price of $77 per copy. Should the offer be accepted?