Problem 2

(25 points)

ABC Publishing negotiated with Jane Doe, a well-respected suspense novelist, to publish her new novel. ABCs editors expect the new book to be highly successful. The budgeted cost analysis for producing and releasing the new book are as follows:

• Production and marketing of $350,000 and $2.50 per book sold
• Royalties to Jane Doe of $850,000 and 20% of the net book sales, i.e., net of the amounts paid to the bookstore by ABC Publishing.
• ABC Publishings net selling price is the $30 list price per book minus the charges paid to bookstores, which are:
  • 25% of the publishers list price per book and
  • a $1.50 per book shelving fee which will ensure that the book is placed in a featured section of the bookstore

Table 1

Sales revenue		3000000
Less : Variable cost
Bookstore charges	750000
Book Shelving fees	150000
Production and marketing	250000
Royalties	420000	1570000
Contribution margin		1430000
Less : Fixed cost
Production and marketing	350000
Royalties	850000	1200000
Net Income		230000

Required

(Note: For all computations below, ignore the income tax implications)

Using Table 1, answer the following:

1. 1. How many copies of Jane Does book must ABC Publishing sell to achieve breakeven on the sale of Jane Does book?
   2. How many copies must be sold for ABC Publishing to generate $125,000 of income on the sale of Jane Does book?
2. For each of the following independent proposal modifications to the original deal, determine operating income and breakeven in copies sold (based on 100,000 units sold), if ABC Publishing revised the deal as follows:
   1. Decrease the royalty to Jane Doe from 20% to 10% of net bookstore sales while increasing the fee to Jane Doe to $1 million. All other given information stays the same.
   2. Increasing the bookstore listed price from $30 to $35 while keeping the bookstore fee at the original 25% level but not paying the $1.50 shelving fee. Assume that with the price increase, unit sales will decrease to 85,000 books. All other information remains unchanged.
3. From your analysis above, which alternative is best financial deal for (a) ABC Publishers and (c) for Jane Doe? Please explain your answer.