2. The world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks for $7 each. The variable cost...

2. The world-famous discounter, Fernwood Booksellers, specializes in selling paperbacks 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. $200,000

b. $333,333

c. $466,667

d. $600,000

e. None of these choices are correct.

Solutions

Expert Solution

How much more money can the publisher put into advertising (a fixed cost) and still break even?

Answer: $200,000

Working:

Since sale remains constant, maximum more money we can invest into advertising will be the savings from reduction in variable cost.

Saving from reduction in variable cost = Sale unit * (old variable cost per unit – reduced variable cost per unit)

= 200,000 * ($5 – $4)

= $200,000

jeff jeffy answered 2 years ago

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