Question

Claire wrote a book “Mergers and Acquisitions for Dummies” and sold exclusive rights for it to a profit-maximizing monopolistic publisher for $20,000. According to the contract, she is also entitled to 15 percent of the total revenue from the sales of the book.

Publisher beliefs about the demand for this book are shown in the table below.
Publisher’s cost of printing the book is $12 per copy.

Price charged	Projected copies sold
$40	3,000
$35	6,000
$30	10,000
$25	14,000
$20	19,000
$15	25,000
$10	33,000

a. (3 pts) Which of the prices listed in the table would the publisher prefer to charge for the book? Explain why.

b. (3 pts) Which of the prices would Claire prefer to see the publisher charge? Explain why.

c. (3 pts) What is the maximum total amount of royalties Claire can expect to receive?

Answer 1

Computation is as follows :

Amount for exclusive right sale Clair received from the Publisher = $20,000

Publisher's cost of printing a copy = $12

% revenue Claire receives on book sale = 15%

Publisher's Sales revenue = price charged * projected copies sold

Publisher's Cost of printing books = Projected copies sold * Publisher's cost of printing a copy

Amount paid to Claire (15% of Publisher's Sales' revenue) = Publisher's Total Sales revenue *

                                                                                     % revenue Claire receives on book sale

Publisher's Profit = Publisher's Sales revenue -

                            Publisher's Cost of printing books -

                            Paid to Claire (15% of Publisher's Sales' revenue) -

                            One time amount paid to Claire for book rights

                       

Computation table for each of the price listed

a. Publisher would prefer to charge $30 for the book as it maximizes his profit of $115,000 at the projected copies sold of 10,000.

b. Claire would prefer to see the publisher charge $20. At this price her revenue from the projected copies sold of 19,000 is maximum of $57,000. Including the one time receipt of $20,000 for selling book rights, her total earning from the book at the projected number of copies becomes $77,000 ($57,000 + $20,000)

c. At the price of $30 that Publisher would prefer to sell the book, the maximum amount of royalty that Claire can expect to receive is $45,000. Including the one time receipt of $20,000 for selling book rights, her total earning from the book at the projected number of copies becomes $65,000 ($45,000 + $20,000)