The Family Doctor Magazine is published monthly in Ho Chi Minh City,
Vietnam, aimed at providing health, nutrition, fitness, and medical information to young families. (See Exhibit 1 for the cover page of a recent issue.) The magazine is typically about 60 pages in length and is printed on glossy magazine stock paper with lightly laminated front and back covers to give the magazine a more long-lasting feeling than a typical magazine. This allows the magazine to become a shelf reference for the buyer. Inaddition to feature stories, the magazine includes advertisements for products and services related to the themes noted above. Monthly circulation varies from 4,000 to 8,000 copies sold depending on the issue and the time of year.
The magazine frequently surveys its readers to determine their opinions on the contents and the publication quality. It has also asked the readership about the sales price. At present The Family Doctor Magazine sells for 15,000 Vietnamese Dong (VND) per issue.1 However, customers have consistently expressed the feeling that the price should be lowered.
Ms. Nguyen ThiThanh Ha is the controller of the company that publishes The
Family Doctor Magazine. She would like to respond to the customer concerns and see what would be the impact of changing the prices. She has evaluated the costs of producing the magazine and has calculated both fixed and variable costs. Exhibit 2 shows these costs.
Problems:
1. Assume that the price per copy is fixed at 15,000 VND and that Ms. Nguyen can sell as many copies as she wants at that price.
a. What is the quantity of magazines that needs to be sold per month in order for the operation to break-even?2
1 At current (2002) exchange rates there are about 15,000 VND per one U.S. dollar. Hence, the price per issue is about $1. Per capita GDP in Vietnam is about $2,000 annually (when adjusted to purchasing powerparity).
2 The magazine also receives revenues from advertisers. To keep this case simple, we will ignore the impact of the cost and revenues associated with such advertising on the calculations.
2b. What will happen to that break-even quantity if the following occurs, other things constant:
i. Publishing fees increase by 1,000,000 VND.
ii. Paper stock costs decrease by 500 VND
iii. Sales commissions increase by 1,000 VND
2. Ms. Nguyen rightly concludes from the break-even analysis done in problem 1that if she can increase sales at a constant price of 15,000 VND, profits will be limitless and will depend only on how many magazine are sold. However, she knows this is not realistic. She knows that in order to sell more, she will have to lower the price and customers have expressed a preference for this. She has determined that at the current price of 15,000 VND, the magazine sells about 5,100 copies per month. She estimates that if the price is lowered to 10,000 VND, sales will increase to 8,500 copies per month. On the basis of this data she estimates the following demand curve:
P = 22500 - 1.47Q
P is the price per copy and Q is the number of copies sold. Assume that this demand curve is correct.
a. Using the demand curve and the cost information of Exhibit 2, calculate the quantity of copies sold per month that would maximize the revenues from sales. Also calculate the price that should be charged in order to sell that quantity. What will be the profits?3
b. What quantity sold per month will maximize profits as defined in footnote 3? What price should be set in order to sell this quantity? What will be the amount of profit?
3. What do these results suggest about the feasibility of lowering the price as the customers have suggested in the survey?
Footnote
3 For the purpose of this case we define profits as total revenues from sales less total costs as reflected in Exhibit.
Exhibit: Fixed and Variables Costs (all amounts in Vietnam Dong)
|
Fixed Costs
|
Amount
|
|
Variable Cost
|
Amount per Magazine
|
|
|
|
|
|
|
|
Art & Graphics
|
4,000,000
|
|
Paper Stock
|
2340
|
|
Editing
|
5,000,000
|
|
Binding
|
300
|
|
Proofing
|
500,000
|
|
Plastic Lamination
|
115
|
|
Advertising
|
2,000,000
|
|
Sales Lamination
|
4500
|
|
Film Output
|
5,000,000
|
|
Shipping
|
200
|
|
Typesetting
|
336,000
|
|
Printing and Tax
|
1208
|
|
Publishing Fees
|
3,150,000
|
|
Promotion
|
500
|
|
Dsitribution Tax
|
1,350,000
|
|
|
|
|
Cost for Printing Shift
|
3,570,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
24,906,000
|
|
Total
|
9163
|