A Cost-Volume-Profit Problems

A. The textbook publishing business provides a good illustration of the effective use of
cost-volume profit analysis for new product decisions. Consider the hypothetical cost-
volume-profit analysis data shown in Table. Fixed costs of $100,000 can be estimated quite
accurately. Variable costs are linear and set by contract. List prices are variable, but
competition keeps prices within a sufficiently narrow range to make a linear total revenue
curve reasonable. Variable costs for the proposed book are $92 a copy, and the price is
$100. How much is the breakeven in units?

B. Publishers evaluate the size of the total market for a given book, competition, and other
factors. With these data in mind, they estimate the probability that a given book will reach or
exceed the breakeven point. If the publisher estimates that the book will neither meet nor
exceed the breakeven point, they may consider cutting production costs by reducing the
number of illustrations, doing only light copyediting, using a lower grade of paper,
negotiating with the author to reduce the royalty rate, and so on. Assume now that the
publisher is interested in determining how many copies must sell to earn a $20,000 profit?

C. Consider yet another decision problem that might confront the publisher. Assume that a
book club has offered to buy 3,000 copies at a price of $77 per copy. Cost-volume-profit
analysis can be used to determine the incremental effect of such a sale on the publisher’s
profits. Variable costs per copy are $92, but note that $25 of this cost represents bookstore
discounts. How much is the additional profit contribution assuming that these 3,000 copies
would not have been sold through normal sales channel?