Elephant Books sells paperback books for $7 each.The variable cost per book is $5.At current annual sales of 200,000 books,the publisher is just breaking even.It is estimated that if the authors' royalties are reduced,the variable cost per book will drop by $1.Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?
A)$600,000
B)$466,667
C)$333,333
D)$200,000

Question

Quizplus · Accepted Answer

With the reduction in variable cost per book from $5 to $4, the contribution margin per book increases from $2 to $3. At the same sales volume of 200,000 books, this results in an additional $200,000 ($1 extra per book times 200,000 books) that can be allocated to advertising while still breaking even.

Elephant Books Sells Paperback Books for $7 Each