East Publishing Company is doing an analysis of a proposed new finance text. Using the following data, answer Parts a through e.
Fixed Costs (per edition): Development (reviews, class testing, and so on) $18,000 Copyediting 5,000 Selling and promotion 7,000 Typesetting 40,000 Total $70,000 Variable Costs (per copy): Printing and binding $4.20 Administrative costs 1.60 Salespeople’s commission (2% of selling price) .60 Author’s royalties (12% of selling price) 3.60 Bookstore discounts (20% of selling price) 6.00 Total $ 16.00 Projected Selling Price $ 30.00 The company’s marginal tax rate is 40 percent. a. Determine the company’s breakeven volume for this book. •i. In units ii. In dollar sales b. Develop a breakeven chart for the text. c. Determine the number of copies East must sell in order to earn an (operating) profit of $21,000 on this text. d. Determine total (operating) profits at the following sales levels: i. 3,000 units •ii. 5,000 units iii. 10,000 units e. Suppose East feels that $30.00 is too high a price to charge for the new finance text. It has examined the competitive market and determined that $24.00 would be a better selling price. What would the breakeven volume be at this new selling price?
1 answer:
Answer:
a. Determine the company’s breakeven volume for this book. •i. In units ii. In dollar sales
total fixed costs = $70,000
variable costs per unit = $16
sales price = $30
contribution margin = $30 - $16 = $14
break even point in units = $70,000 / $14 = 5,000 textbooks
break even point in $ = 5,000 x $30 = $150,000
b. Develop a breakeven chart for the text.
units fixed costs variable costs total costs total sales
0 70000 0 70000 0
1000 70000 16000 86000 30000
2000 70000 32000 102000 60000
3000 70000 48000 118000 90000
4000 70000 64000 134000 120000
<u>5000 70000 80000 150000 150000 </u>
6000 70000 96000 166000 180000
I attached the graph that corresponds to this break even chart.
c. Determine the number of copies East must sell in order to earn an (operating) profit of $21,000 on this text.
($70,000 + $21,000) / $14 = 6,500 units
total sales = 6,500 x 30 = $195,000
d. Determine total (operating) profits at the following sales levels: i. 3,000 units •ii. 5,000 units iii. 10,000 units
i. $28,000 loss
ii. no gain/loss, break even point
iii. $70,000 gain
e. Suppose East feels that $30.00 is too high a price to charge for the new finance text. It has examined the competitive market and determined that $24.00 would be a better selling price. What would the break even volume be at this new selling price?
new contribution margin = $24 - $16 = $8
new break even point in units = $70,000 / $8 = 8,750 textbooks
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