Problem 10-3 Eastman Publishing Company is considering publishing an electronic

Question

Problem 10-3 Eastman Publishing Company is considering publishing an electronic textbook about spreadsheet applications for business. The fixed cost of manuscript preparation, textbook design and web-site construction is estimated to be $170,000. Variable processing costs are estimated to be $6 per book. The publisher plans to sell single-user access to the book for $52 (a) Build a spreadsheet model in Excel to calculate the profit/loss for a given demand. What profit can be anticipated with a demand of 3,600 copies? For subtractive or negative numbers use a minus sign. (b) Use a data table to vary demand from 1,000 to 6,000 in increments of 200 to test the sensitivity of profit to demand. Breakeven occurs where profit goes from a negative to a positive value, that is, breakeven is where total revenue total cost yielding a profit of zero. In which interval of demand does breakeven occur? (i) Breakeven appears in the interval of 3,200 to 3,400 copies. (ii) Breakeven appears in the interval of 3,600 to 3,800 copies ii) Breakeven appears in the interval of 3,800 to 4,000 copies. (iv) Breakeven appears in the interval of 4,000 to 4,200 copies. Option (ii) (c) Use Goal Seek to answer the following question. With a demand of 3,600 copies, what is the access price per copy that the publisher must charge to break even? If required, round your answers to two decimal places.

Explanation / Answer

(a) Total Demand X = 3600 copies

Fixed Cost = $ 170,000

Varaible Cost = $6x

Total Cost = 170,000 + 6x

Total Revenue = 52x

Total profit = 52x - (170,000 + 6x ) = 46x - 170,000

for x= 3600

Total expected profit = 46 * 3600 - 170000 = - $ 4400

(b) Spreadsheet Model

The Profit turned from loss to profit in between 3600 to 3800 units.

(c) Lets say access price per copy is p to have a break even.

SO profit = 0 at access price p and demand = 3600 copies

px - (170000 + 6x) = 0

(p-6)x = 170000

(p-6) = 170,000/ 3600 = 47.22

p = $ 53.22

so, Price would be 53.22 to breakeven

X Fixed Cost Variable Cost Total Cost Total Revenue Total Profit 1000 170000 6000 176000 52000 -124000 1200 170000 7200 177200 62400 -114800 1400 170000 8400 178400 72800 -105600 1600 170000 9600 179600 83200 -96400 1800 170000 10800 180800 93600 -87200 2000 170000 12000 182000 104000 -78000 2200 170000 13200 183200 114400 -68800 2400 170000 14400 184400 124800 -59600 2600 170000 15600 185600 135200 -50400 2800 170000 16800 186800 145600 -41200 3000 170000 18000 188000 156000 -32000 3200 170000 19200 189200 166400 -22800 3400 170000 20400 190400 176800 -13600 3600 170000 21600 191600 187200 -4400 3800 170000 22800 192800 197600 4800 4000 170000 24000 194000 208000 14000 4200 170000 25200 195200 218400 23200 4400 170000 26400 196400 228800 32400 4600 170000 27600 197600 239200 41600 4800 170000 28800 198800 249600 50800 5000 170000 30000 200000 260000 60000 5200 170000 31200 201200 270400 69200 5400 170000 32400 202400 280800 78400 5600 170000 33600 203600 291200 87600 5800 170000 34800 204800 301600 96800 6000 170000 36000 206000 312000 106000

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