1. Eastman Publishing Company is considering publishing an electronic textbook o

Question

1. Eastman Publishing Company is considering publishing an electronic textbook on spreadsheet applications for business. The fixed cost of manuscript preparation, textbook design, and Web site construction is estimated to be $160,000. Variable processing costs are estimated to be $6 per book. The publisher plans to sell access to the book for $46 each.

a. Build a spreadsheet model to calculate the profit/loss for a given demand. What profit can be anticipated with a demand of 3500 copies?

b. Use a data table to vary demand from 1000 to 6000 increments of 200 to assess the sensitivity of profit to demand.

c. Use Goal Seek to determine the access price per copy that the publisher must charge to break even with a demand of 3500 copies.

Explanation / Answer

Answer:

a) Statement of Profit/Loss for demand of 3500 Copies

Particulars

Amount

Sales (3500 Copies x $46)

$161,000

Less: Variable Cost ($6 x 3500)

($21,000)

Contribution

$140,000

Less: Fixed Cost

($160,000)

Loss

($20,000)

B)

C)

c) Calculation of access price per copy that the publisher must charge to break even with a demand of 3500 copies

We know that the Break Even Point is the level of Sales where Fixed Costs are recovered.

Let New Selling Price per Copy = $P

Now the equation at 3500 copies of demand will be

Particulars

Amount

Sales (3500 Copies x P)

3500P

Less: Variable Cost ($6 x 3500)

($21,000)

Contribution

3500P - $21,000

At Break Even NO PROFIT NO LOSS

Hence the equation will be Contribution = Fixed Cost

3500P - $21,000 = $160,000

3500P = $160,000 + $21,000 = $181,000

P = $181,000 / 3500 = $51.7143 (Approx.)

So, the new selling price per copy to break even must be $51.7143 per copy

Therefore the access price per copy to get break even = New Selling Price – Old Selling Price = $51.7143 - $46 = $5.7143 per copy

Here is the calculation with revised per copy price to get Break Even Sales.

Demand = 3500 Copies, New Selling Price = $52.5714

Particulars

Amount

Sales (3500 Copies x $51.7143)

$181,000

Less: Variable Cost ($6 x 3500)

($21,000)

Contribution

$160,,000

Less: Fixed Cost

($160,000)

Profit/ (Loss)

0

Particulars

Amount

Sales (3500 Copies x $46)

$161,000

Less: Variable Cost ($6 x 3500)

($21,000)

Contribution

$140,000

Less: Fixed Cost

($160,000)

Loss

($20,000)

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