Question

Multiple-Product Profitability Analysis, Multiple-Level Profitability Analysis

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.

REQUIRED

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, de-

scribe 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 dis-

tribution 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) BEP Sales -  $17,00,0000

BEP = Fixed Expense / PV Ratio

=$4,20,000 / .25

PV Ratio = 25%

Sales = 100%

Direct Cost = 70% ( amount paid to Publisher)

Other Variable cost = 5%, therefore total Variable Cost = 75%

Contribution = 100% -75%

So PV ratio = 25% / 100% = 25%

b) 13,440 Units

BEP in units =Fixed Expense / Contribution

=$4,20,000 / $31.25

Selling Price = $125

Direct Cost = $87.5 (125 x 70%)

Other Variable = $6.25 (125 x 5%)

Contribution = $31.25

c) At 13440 Units os sale new books is getting Break even but at 13,440 units used books sales genrates $4,20,000 Profit

Suggested Retail Price = $125

Selling Price of Used Book = $93.75 ($125 x 75%)

Cost of Used Book = $31.25 ($125 x 25%)

Contribution = $62.50

BEP in units = $4,20,000 / $62.50 =6720 Units

Profit =$4,20,000

= (13440 units x $62.50) - $4,20,000

d) BEP Sales of Chigago- $4,38,461.53

Projecet Level Cost (Fixed Cost) = $2,85,000

BEP = Fixed Expense / PV Ratio

=$2,85,000 / 0.65 = $4,38,461.53

PV Ratio = 65%

Sales = 100%

Direct Production Cost = 20%

Royality to = 15%, therefore total Variable Cost = 35%

Contribution = 100% -35%

So PV ratio = 35% / 100% = 35%

e)

working are based on the details provided in question (d)

1 unit Level Contributon

Books Stores Unit Levl Contribution
Sales in units	10000	Remarks
Selling Price	$125.00
Amount paid to Publishing	$43.85	( 4,38,461.53 / 10,000)
Contribution per unit	$81.15
Contribution	$8,11,500

2 Project Level Contribution

Project Unit Levl Contribution
Sales in units	10000	Remarks
Selling Price	$43.85	( 4,38,461.53 / 10,000)
Production & distribution cost	$8.77	43.85 x 20%
Amount paid as royality	$6.58	43.85 x 15%
Contribution per unit	$28.50
Contribution	$2,85,025

3. Authours Royality

(10000 x $6.58)

Royality

$65,775.00