Kevin Fraser is the newly elected leader of the United Party. Media Publishers is negotiating to publish Frasers Manifesto, a new book that promises to be an instant best seller. The fixed costs of producing and marketing the book will be $500 000. The variable costs of producing and marketing will be $4.00 per copy sold. These costs are before any payments to Kevin Fraser. Fraser negotiates an up-front payment of $3 million, plus a 15% royalty rate on the net sales price of each book. The net sales price is the listed bookstore price of $30, minus the margin paid to the bookstore to sell the book. The normal bookstore margin of 30% of the listed bookstore price is expected to apply.

(1) How many copies must Media Publishers sell to: (a) break even and (b) earn a

target profit of $2 million?

(2) Examine the sensitivity of the break-even point to the following changes:

a decreasing the normal bookstore margin to 20% of the listed bookstore price of $30

b increasing the listed bookstore price to $40 while keeping the bookstore margin at 30%

c Comment on the results.