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The world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks for $8.75 each. The variable cost per...

The world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks for $8.75 each. The variable cost per book is $6.15. 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 $.95 (ninety-five cents). 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?

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Answer:

Calculation of the Fixed cost formula is given by

Sales = Variable cost + Fixed cost = 0

Sales - Variable cost = Fixed cost

$8.75(200000) - $6,15(200000) - Fixed cost = 0

$1750000 - $1230000 - Fixed cost = 0

Fixed cost = $520000

$8.75(200000) - $5.2(200000) - Fixed cost = 0

$1750000 - $1040000 - Fixed cost = 0

Fixed cost = $710000

Fixed cost = $710000- $520000

= $190000.

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