Textbook publishers evaluate market size, the degree of competition, expected revenues, and costs for each prospective new title. 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:

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.
A. Estimate the volume necessary to reach a breakeven level of output.
B. How many textbooks would have to be sold to generate a profit contribution of $20,000?
C. Calculate the economic profit contribution or loss resulting from the 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 beaccepted?

  • CreatedFebruary 13, 2015
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