Question

Assume UCLA Store sells new college textbooks at the publishers' suggested retail prices and pays the publishers an amount equal to 70% of the suggested retail price. The store's other variable costs average 5% of sales revenue and annual fixed costs amount to $420,000.

a. Determine the bookstore's annual break-even point in sales dollars.

b. Assuming an average textbook has a suggested retail price of $125, determine the bookstore's annual break-even point in units.

c. UCLA Store is planning to add used book sales to its operations. A typical used book costs the store 25% of the suggested retail price of a new book. The bookstore plans to sell used books for 75% of the suggested retail price of a new book. Assuming unit sales are unchanged, describe the effect on bookstore profitability of shifting sales toward more used and fewer new textbooks.

d. Chicago Publishers produces and sells new textbooks to college and university bookstores. Assume typical project-level costs total $285,000 for a new textbook. Production and distribution costs amount to 20% of the net amount the publisher receives from the bookstores. Textbook authors are paid a royalty of 15% of the net amount received from the bookstores. Determine the dollar sales volume required for Chicago to break even on a new textbook. This is the amount the bookstore pays the publisher, not the bookstore's sales revenue.

e. For a project with predicted sales of $10,000 new books at $125 each, determine

1). The bookstores' unit-level contribution

2). The publisher's project-level contribution

3). The author's royalties

Answer 1

a. Annual Break Even Point in Dollars:

BEP = Fixed Cost / Contribution Margin

Fixed Cost = $420,000 , Contribution Margin = 100 - 70 - 5 = 15%

BEP in Dollars = 420,000 / 15% = $2,800,000

b. BEP in Units:

Contribution Per Unit = 125 x 15% = $18.75

BEP in Units = Fixed Cost / Contribution Per Unit

BEP in Units = 420,000 / 18.75 = 2133 Units

c.

	New Books(%)	Used Books(%)
Sales	100	75
- VC	70 + 5 (Other VC)	20 + 5 (Other VC)
Contribution Margin	25	50

So, Profitability will increase by Same ratio in selling of Used Books.

d. Calculation of Contribution Margin:

100 - 20 (Production and Distribution Cost) - 15 (Royalty)= 65%

BEP = Fixed Cost / Contribution Margin

BEP in Dollars = 285,000 / 65% = $438462