Question

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?

Answer 1

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

5000 70000         80000         150000       150000

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