Question

Tomas King is a new author for SingleDay Publishing. SingleDay Publishing is negotiating to publish Tomas’s new book, which promises to be an instant best- seller. The fixed costs of producing and marketing the book will be $ 575,000. The variable costs of produc-ing and marketing will be $ 4.50 per copy sold. These costs are before any payments to Tomas. Tomas negotiates an up- front payment of $ 2.5 million, plus a 10% royalty rate on the net sales price of each book. The net sales price is the listed bookstore price of $ 35, 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. Prepare a PV graph for SingleDay Publishing.
2. How many copies must SingleDay Publishing sell to
(a) Break even and
(b) Earn a target operating income of $ 850,000?
3. Examine the sensitivity of the breakeven point to the following changes:
a. Increasing the royalty rate to 12% of the net sales price of each book.
b. Increasing the listed bookstore price to $ 40 while keeping the royalty rate at 10%.
c. Comment on the results and indicate which option you would prefer and why, indicating clearly any assumptions that you have made.



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  • CreatedJanuary 15, 2015
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