Whitney Enterprises sells embossed cookbooks that contain not only recipes but also color photography of the food and local scenery. In 2008, Whitney sold 50,000 books for $80 per set. In 2008, the costs to manufacture those sets included the following:
Variable cost per book:
Paper.................................................................................. $10
Cover and internal art........................................................ 18
Direct labor....................................................................... 5
Variable overhead........................................................ 12
Fixed overhead.................................................... $1,250,000
In 2009, Whitney received a 10 percent discount on paper, cover material, and ink because of the volume of those items that were purchased. Because of the increased use of the Internet to obtain recipes, sales are expected to decrease in future years. The decrease in sales will require a decrease in production.
Required:
(a) Calculate Whitney’s pretax profit in 2008 using CVP analysis.
(b) Calculate Whitney’s pretax profit for 2009 if both total variable cost increases by 15 percent and sales volume decreases by 10 percent.
(c) Calculate Whitney’s pretax profit for 2009 if both total variable cost decreases by 20 percent and sales volume increases by 15 percent.
(d) Write a memo to Whitney’s management discussing how variable and fixed costs might be decreased to compensate for the decrease in volume.