Elephant Books sells paperback books for $7 each. The variable cost per book is

Question

Elephant Books sells paperback books for $7 each. The variable cost per book is $5. At current annual sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1. Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?
Answer

a. $600,000

b. $466,667

c. $333,333

d. $200,000

e. None of the above

Explanation / Answer

Currently, we break even.

Profit is sales revenue - variable cost per book * books sold - fixed cost which = 0

So now if everything is constant, but variable cost per books changes by $1, then the only part affected is the middle

1*200000. This means $200,000 in profit to spend on advertising. So D.

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