Southeast U\'s campus book store sells course packs for $15.00 each, the variabl

Question

Southeast U's campus book store sells course packs for $15.00 each, the variable cost per pack is $11.00, fixed costs for this operation are $300,000, and annual sales are 100,000 packs. The unit variable cost consists of a $4.00 royalty payment, VR, per pack to professors plus other variable costs of VO = $7.00. The royalty payment is negotiable. The book store's directors believe that the store should earn a profit margin of 10% on sales, and they want the store's managers to pay a royalty rate that will produce that profit margin. What royalty per pack would permit the store to earn a 10% profit margin on course packs, other things held constant?

Explanation / Answer

Assuming no taxes
Sales 1500000
Royalty 400000
Variable costs 700000
Fixed costs 300000
Profit 100000
Assuming the profit margin of 10%, the break up of income statement is as follows
Sales 1500000
Royalty 350000
Variable costs 700000
Fixed costs 300000
Profit 150000
Royalty per pack =350000/100000 = 3.5 per pack aanswre

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