Debbie’s Book Nook sells textbook material bundles for $17.00 each, the variable

Question

Debbie’s Book Nook sells textbook material bundles for $17.00 each, the variable cost per pack is $12.50, fixed costs for this operation are $325,000, and annual sales are 117,000 bundles. The unit variable cost consists of a $3.50 royalty payment, VR, per bundle to publishers plus other variable costs of VO = $9.00. The royalty payment is negotiable. The book store's directors believe that the store should earn a profit margin of 12% on sales, and they want the store's managers to pay a royalty rate that will produce that profit margin. What royalty per bundle would permit the store to earn a 12% profit margin on textbook material bundles, other things held constant?

Explanation / Answer

Computation of Profit:
Sales (117,000*17) 1,989,000
Less: Variable Costs
Royalty (117,000*x) 117,000x
Other VC (117,000*9) 1,053,000 (117,000x+1,053,000)
Contribution -117,000x+936,000
Less: FC 325,000
Profit -117,000x+611,000


Desired Profit = 1,989,000*12% = 238,680
-117,000x+611,000 = 238,680
-117,000x = -372,320
x = $3.1822 per unit

Therefore, the royalty per bundle to earn a profit of 12% = $3.1822 per unit

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