question archive Elephant Books sells paperback books for $7 each
Elephant Books sells paperback books for $7 each
Subject:FinancePrice:2.87 Bought7
Elephant Books sells paperback books for $7 each. The variable cost per book is $5. At current annual sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1. Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?
a S600,000
b S466,667
c. $333,333
d. 200,000
e. None of the above
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Answer: d.$ 200,000
Contribution margin per unit = $ 7 - $ 5 = $ 2
Breakeven unit sales = Total Fixed Cost / Contribution Margin per Unit = Total Fixed Cost / $ 2 = 200,000
Therefore, total fixed cost = $ 400,000.
Proposed contribution margin = $ 3
Let the incremental advertising cost be Y.
( 400,000 + Y ) = 200,000 x $ 3
or Y = $ 200,000
