Problem:
Debbie's Book Nook sells textbook material bundles for $17.00 each, the variable cost per pack is $12.50, fixed costs for this operation are $325,000, and annual sales are 117,000 bundles. The unit variable cost consists of a $3.50 royalty payment, VR, per bundle to publishers plus other variable costs of VO = $9.00. The royalty payment is negotiable. The book store's directors believe that the store should earn a profit margin of 12% on sales, and they want the store's managers to pay a royalty rate that will produce that profit margin. What royalty per bundle would permit the store to earn a 12% profit margin on textbook material bundles, other things held constant?
| Sales Price (P) |
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? |
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| Target Profit Margin |
|
? |
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|
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| Current Royalty (VR) |
|
? |
| Other Variable Cost (VO) |
? |
| Total Variable Cost (V) |
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$ 12.50 |
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| Annual Sales (Q) |
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117,000 |
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| Fixed Cost (F) |
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? |
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| Current profit = PxQ - VRxQ - VOxQ - F |
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| Current Profit = |
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| Sales (PQ) |
|
#VALUE! |
| VRQ |
|
#VALUE! |
| VOQ |
|
#VALUE! |
| F |
|
? |
| Current Profit |
|
#VALUE! |
|
|
|
| Current Profit Margin |
|
#VALUE! |
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|
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| Target Profit = |
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|
| Sales (PxQ) |
|
#VALUE! |
| Target Profit Margin |
|
? |
| Target Profit |
|
#VALUE! |
|
|
|
| So we want |
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| PQ - VRQ - VOQ - F = |
|
#VALUE! |
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|
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| Target Profit = |
|
|
| Sales (PQ) |
|
#VALUE! |
| VRQ |
|
? |
| VOQ |
|
#VALUE! |
| F |
|
? |
| Profit |
|
#VALUE! |
|
|
|
| VRQ = |
|
#VALUE! |
| Q = |
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117,000 |
| Target VR = |
|
#VALUE! |