Textbook publishers evaluate market size, the degree of competition, expected revenues, and costs for each prospective new title. 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 a book will not exceed the breakeven point based upon standard assumptions, they may consider cutting production costs by reducing the number of illustrations, doing only light copy editing, using a lower grade of paper, or negotiating with the author to reduce the royalty rate. To illustrate the process, consider the following data:

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 narrow range. Variable costs for the proposed book are $92 a copy, and the expected wholesale price is $100. This means that each copy sold provides the publisher with an $8 profit contribution.
A. Estimate the volume necessary to reach a breakeven level of output.
B. How many textbooks would have to be sold to generate a profit contribution of $20,000?
C. Calculate the economic profit contribution or loss resulting from the acceptance of a book club offer to buy 3,000 copies directly from the publisher at a price of $77 per copy. Should the offer beaccepted?

Transcribed Image Text:

Cost Category Dollar Amount Fixed Costs Copyediting and other editorial costs Illustrations Typesetting Total fixed costs Variable Costs Printing, binding and paper Bookstore discounts Sales staff commissions Author royalties General and administrative costs Total variable costs per copy $15,750 32,750 51,500 S100.000 $22.50 25.00 8.25 10.00 26.25 S92.00 List price per copv $100.00