Eastman publishing company is considering publishing a paperback textbook on spr

Question

Eastman publishing company is considering publishing a paperback textbook on spreadsheet applications for business. The fixed cost of manuscript preparation, textbook design and production setup is estimated to be $160,000. Variable production and material costs are estimated to be $6 per book. Demand over the life of the book is estimated to be 4,000 copies. The publisher plans to sell the text to college and university bookstores for $46 each.

a. what is the breakeven point?

b. What profit or loss can be anticipated with a demand of 3800 copies?

c. With a demand of 3800 copies , what is the minimum price per copy that the publisher must charge to break even?

d. if the publisher believes that the price per copy could be increased by $50.95 and not affect the anticipated demand of 4000 copies, what action would you recommend? What profit or loss can be anticipated

Please show work on excel

Explanation / Answer

Solution

Back-up Theory

1. If number of books produced is n, total cost, C = F + Vxn,…. (1)

    where F = fixed cost and V = variable cost per book.

2. Profit, P = Sxn – C, where S = selling price per book ….. (2)

3. If the break-even n is b, then we should have, Sxb – C = 0 or b(S - V) = F ….. (3)

Now, to work out the problem, we have, F = $160000; V = $6; S = $46 ….. (4)

Part (a)

Substituting (4) in (3): b(46 - 6) = 160000 or b = 4000. ANSWER

Part (b)

Substituting n = 3800, in (2), Profit = (46x3800) – {160000 - (6 x 3800) = - 8000 =>

Loss = $8000 ANSWER

Part (c)

Let the break-even price be $s per book, then we should have

3800s – {160000 + (6 x 3800)} = 0 or 3800(s - 6) = 160000 or (s - 6) = 160000/3800 = 42.11 or Break-even price at demand 3800 is $48.11 ANSWER

Part (d)

NOTE: The question says ‘price per copy could be increased by $50.95’. It is unlikely to be ‘by’ – more likely it is ‘to’

Taking ‘price per copy could be increased to $50.95’, from (2), Profit = (4000x50.95) – {160000 + (6x4000)} = (4000x44.95) – 160000 = $19800 ANSWER

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