Hoot Washington is the newly elected charismatic leader of the Western Party. He is the darling of the right-wing media. His “take no prisoners” attitude has left many an opponent on a talk show feeling run over by a Mack truck.

Media Publishers is negotiating to publish Hoot’s Manifesto, a new book that promises to be an instant bestseller. The fixed costs of producing and marketing the book will be $600,000. The variable costs of producing and marketing will be $4.80 per book. These costs are before any payments to Hoot. Hoot negotiates an up-front payment of $3.60 million plus a 15% royalty rate on the net sales price of each book. The net sales price is the listed bookstore price of $36 minus the margin paid to the bookstore to sell the book. The normal bookstore margin of 30% of the listed bookstore price is expected to apply.

REQUIRED

1. How many copies must Media Publishers sell to (a) break even and (b) earn a target operating profit of $2.4 million?

2. Examine the sensitivity of the breakeven point to the following changes:

a. Decreasing the normal bookstore margin to 20% of the listed bookstore price of $36.

b. Increasing the listed bookstore price to $48 while keeping the bookstore margin at 30%.