The textbook publishing business provides a good illustration of the effective use of cost-volume-profit analysis for new product decisions. Consider the hypothetical cost-volume-profit analysis data shown in Table 8.2. Fixed costs of $100,000 can be estimated quite accurately. Variable costs are linear and set by contract. List prices are variable, but competition keeps prices within a sufficiently narrow range to make a linear total revenue curve reasonable. Variable costs for the proposed book are $92 a copy, and the price is $100. This means that each copy sold provides $8 in profit contribution. Applying the breakeven formula from Equation 8.6, the breakeven sales volume is 12,500 units, calculated as
= 12,500 units
Publishers evaluate the size of the total market for a given book, competition, and other factors. With these data in mind, they estimate the probability that a given book will reach or exceed the breakeven point. If the publisher estimates that the book will neither meet nor exceed the breakeven point, they may consider cutting production costs by reducing the
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