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.