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

Let x be the royalty per bundle annual sales = 117,000 bundles Price per bundle = $17.00 Revenue = $1,989,000 Cost = 117,000*9 + 117,000*x + $325,000 = 1378000 + 117,000*x Profit = Revenue - Cost = $1,989,000 - 1378000 - 117,000*x = 611000 - 117,000*x Profit margin = (611000 - 117,000*x )/$1,989,000 Required profit Margin = .12 (611000 - 117,000*x )/$1,989,000 = .12 (611000 - 117,000*x ) = 238680 x = 3.1822 royalty per bundle = $3.1822

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