Eastman Publishing Company is considering publishing a paperback textbook on spr

Question

Eastman Publishing Company is considering publishing a paperback textbook on spreadsheet applications for business. The fixed cost of manuscript preparation, textbook design and production setup is estimated to be $80,000. Variable production and material costs are estimated to be $3 per book. Demand over the life of the book is estimated to be 4000 copies. The publisher plans to sell the text to college and university bookstores for $20 each.

a. What is the breakeven point?
b. What profit or loss can be anticipated with a demand of 4000 copies?
c. With a demand of 4000 copies, what is the minimum price per copy that the publisher must charge to break even?
d. If the publisher believes that the price per copy could be increased to $25.95 and not affect the anticipated demand of 4000 copies, what action would you recommend? What profit or loss can be anticipated?

Explanation / Answer

a. What is the breakeven point?
Ans: 4705 units Break even point is the no proft no loss situation, where total revenue exactly equals total cost. TR= Price x Quantity TC= Fixed cost + (VCxQ) P x Q= FC + VC x Q (Px Q) - (VC xQ) = FC Q(P - VC) = FC               Q= FC/ (P- VC) Q= Break even point (output) FC= fixed cost P= price VC= variable cost. (P- VC) is also called contribution margin per unit. Given: FC (fixed cost) = $80000 VC (variable cost) = $3 Price = $20 Break even point = FC/ (P- VC)                              = 80000/ (20- 3)                              = 80000/17 Break even point = 4705 units. b. What profit or loss can be anticipated with a demand of 4000 copies? Total revenue= Price x Quantity                       = $20 x 4000                       = $80000 Total cost = FC + VCx Q                  = $80000 + $3 x 4000                  = $80000 + $12000                  = $92000 Profit = TR - TC           = $80000 - $92000           = - $12000 firm incurs loss of $12000 at 4000 output.
c. With a demand of 4000 copies, what is the minimum price per copy that the publisher must charge to break even? If 4000 is the BEP, than Break even point = FC/ (P- VC) 4000 = 80000/ (P- $3) P- 3= 80000/4000 P-3 = 20 P= 20+3 P= $23 minimum price that should be chargesd is $23 to get a BEP, or no profit no loss situation.
d. If the publisher believes that the price per copy could be increased to $25.95 and not affect the anticipated demand of 4000 copies, what action would you recommend? What profit or loss can be anticipated? If 4000 units is BEP, than minimu charge that can be charged is $23, here there will be no profit no loss. When we charge $25.95, the excess of $23 on every unit is the profit. TR= P x Q      = $25.95 x 4000      = $103800 TC= $80000 + $3 (4000)      = $92000 Profit= $103800 - $92000          = $ 11800 Alternatively: $23 for 4000 units gives o profit and 0 loss, if we charge $25.95, the excess is 2.95 on 4000 units is the profit, Profit= 2.95 x 4000= $11800.

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