Answer:
Advertising= $933,333
Explanation:
Giving the following information:
The world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks for $7 each. The variable cost per book is $5. At current annual sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1.
First, we need to calculate the fixed costs:
Break-even point (units)= fixed costs/ contribution margin
200,000= fixed costs/ (7 - 5)
200,000= fixed costs/ 2
fixed costs= $400,000
Now, we need to calculate the new break-even point in dollars and units:
Break-even point (dollars)= fixed costs/ contribution margin ratio
Break-even point (dollars)= 400,000 / (6/7)= $466,666.67
Break-even point (units)= fixed costs/ contribution margin
Break-even point (units)= 400,000/6= 66,667 books
Total cost= 400,000 + $66,667= $466,667
Current income= 200,000*7= $1,400,000
Advertising= 1,400,000 - 466,667= $933,333
