Question

12. With respect to the given data of Problem 11, (a) ?nd the publisher’s breakeven output and the output that would lead to a total pro?t of $60,000 if, as a result of a technological breakthrough in printing, the publisher was able to lower its TFC to $40,000. Draw a chart showing your answer. (b) Find the publisher’s breakeven output and the output that would lead to a total pro?t of $60,000 if total ?xed costs remained at $100,000 but average variable costs declined to $10. Draw a chart to show your answer. Note: P12: You do not need to draw the chart.

***Data from problem 11***

Total fixed costs:

Copyediting $ 10,000

Typesetting 70,000

Selling and promotion  20,000

Total fixed costs 100,000

Average variable costs: $ 6

Administrative costs 2

Sales commissions 1

Bookstore discounts 7

Author Royalty $4

Average variable costs $20

Project selling price $30

Answer 1

Solution a:

Variable cost per unit = $20

Selling price = $30

Contribution margin per unit = $30 - $20 = $10 per unit

Desired profit = $60,000

New fixed cost = $40,000

Target contribution = $60,000 + $40,000 = $100,000

Breakeven output = Fixed cost / contribution margin per unit = $40,000 / $10 = 4000 units

Output to earn desired profit = Target contribution / contribution margin per unit = $100,000 / $10 = 10000 units

Solution b:

New Variable cost per unit = $10

Selling price = $30

New contribution margin per unit = $30 - $10 = $20 per unit

Desired profit = $60,000

fixed cost = $100,000

Target contribution = $60,000 + $100,000 = $160,000

Breakeven output = Fixed cost / contribution margin per unit = $100,000 / $20 = 5000 units

Output to earn desired profit = Target contribution / contribution margin per unit = $160,000 / $20 = 8000 units