he Central Publishing Company is about to publish its first textbook in manageri
ID: 1196440 • Letter: H
Question
he Central Publishing Company is about to publish its first textbook in managerial economics. It is now in the process of estimating costs. It expects to produce 10,000 copies during its first year. The following costs have been estimated to correspond to the expected copies. a. Paper Stock $8,000 b. Typesetting $15,000 c. Printing $50,000 d. Art $9,000 e. Editing $20,000 f. Reviews $3,000 g. Promotion $12,000 h. Binding $22,000 i. Shipping $10,000 In addition to the proceeding costs, it expects to pay the authors a 13 percent royalty and its sales people a 3 percent commission. These percentages will be based on the publisher’s price of $48 per textbook. Some of the preceding costs are fixed and others are variable. The average variable costs are expected to be constant. While 10,000 copies is the projected volume, the book could sell anywhere between 0 and 20,000 copies. Using the preceding a) write equations for total cost, average cost, and average variable cost, marginal cost. b) draw the cost curve for quantities from 0 to 20,000 (in intervals of 2,000) (HINT: Start by identifying which costs are fixed and which cost are variable. Variable costs by definition vary with output. Remember that costs given are for 10,000 copies, but we may sell 20,000 so proper allocation of the variable cost items are key! Example: To obtain Reviews of our book, costs 3000. This is fixed, it does not matter how many books we sell. On the other hand, the more books we print the more paperstock we use, this cost is variable. )
Explanation / Answer
Variable Costs: Paper Stock, Printing, Binding, Shipping, Royalty, Sales Commission
Fixed Cost: Typesetting, Art, Editing, Reviews, Promotion = $59,000
a.) Total cost = Fixed Cost + Variable Cost per Unit * No. of Units
Variable Cost per unit = (8,000 + 50,000 + 22,000 + 10,000) / 10,000 + Royalty + Sales Commission
Variable Cost per unit = $9 + 0.13*48 + 0.3*48 = $16.78
We have assumed royalty based on gross revenues
Average Variable Cost = $16.78
Marginal Cost = $16.78
Total Cost = 59000 + 16.78*Books
Average Cost = 59000/Boks + 16.78
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