Stephanie Glace is a new author for Valley Publishing. Valley is negotiating to

Question

Stephanie Glace is a new author for Valley Publishing. Valley is negotiating to publish Glace's new book, which promises to be a best seller. The fixed cost of producing and marketing the book will be $675,000. The variable costs of producing and marketing will be $4.75 per copy sold. These costs are before any payments to Glace. Glace negotiates an up-front payment of $2.5 million, plus a 10% royalty on the net sales price of each book. The net sales price is the listed price of $40 per book less the margin paid to the bookstore to sell the book. The normal bookstore margin of 30% is to apply.

1. How many copies of the book must be sold to break even?

2. At what number of books sold would Stephanie Glace be indifferent between the current compensation scheme and a straight royalty of 30% on the net sales price of each book sold?

Explanation / Answer

Total Fixed Cost for Valley = $675,000 + $2.5*10,00,000 = $3,175,000

Listed Price = $40

Margin paid to Bookstore = 30% * $40 = $12

Net Sale Price = $40-$12 = $28

Royalty Paid to Glace = $28*10% = $2.8

Total Revenue received by Valley per unit = $28 - $2.8 = $25.20

Variable cost for Valley per unit = $4.75

Let, the number of copies to be sold for break-even be 'x'

Thus, the break-even number of copies for Valley = ($3,175,0000)/($25.20-$4.75) = 155,257 copies

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