Hey guys, not sure where to actually post this but.. I'm working on an assignment and have to input some data into excel. I need to figure out total cost and total revenue. Total cost = variable cost + fixed cost. I can't figure out which is which. The question is: fisher publishing is doing a financial analysis for a new book. Editing and preproduction costs are estimated at 45,000. Printings costs are fixed 7,000 for set up plus 8.00 per book. The authors royalty is 8% of the publishers price to bookstores. Advertising and promotion costs are budgeted at 8,000. If the price to bookstores is 35.00, how many books must be sold to break even? Find the break even point algebraic ally and by using and excel graph.. Any help would be great! Thanks
Variable costs can generally be determined as a cost per something. You can think of it as an ongoing cost tied to how much you do. Expressed as a cost per something (printing a book for example)
Fixed costs are what you pay no matter what. In this case, they are things that you are going to have to pay just to get started. Generally they are a one time fee or some fixed amount that occurs on a periodic basis, like rent for a building for example.
Let's start first with costs
-Editing and pre-production will be a one time charge so is fixed $45K
-Printing set up is a one time fee so is fixed $7K
-Printing a book depends on how many books so is variable $8 B where B is the number of book printed
-Authors royalty depends on how many books so is variable 0.08 P B where B is the number of book printed and P is price to book store. Since the price to book stores is $35 the variable cost is $2.80 B
-Advertising and promotion costs are a one time cost (as given) so is fixed $8K
So fixed costs are (45K + 7K + 8K) = $60000 and variable costs are (8 + 2.80) B = $10.80 B. Letting C be costs we have
C = 60000 + 10.80 B
Now for revenue; for every book we print we get $35 so
R = 35 B
where R is revenue and B is our old friend the book. Obviously this is not real world since there is no accounting for spoilage, etc.
Profit is revenue minus cost so
P = 35 B - (60000 + 10.80 B) = 24.20 B - 60000
The equation makes sense (and hopefully is correct) since the more books we print and sell, the more money we make.
Break even is when the costs is equal to (paid for by) the revenue or, to put it another way, when the profit is zero. You can either solve the equation for P = 0 (the algerbraic solution) or plot the profit function and note where it crosses zero (the graphical solution).
