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Question 3 ABC Publishing has negotiated a contract with Jane Doe, a well respected suspense novelist, to publish her new novel. ABC's editors expect the new book to be highly successful. The budgeted cost analysis for producing and releasing the new book are as follows Production and marketing of $250,000 and $5.25 per book sold Royalties to Jane Doe of $2,500,000 and 20% of the book's net sales. Net sales price to ABC Publishing is the $28 listed price minus the fee paid to the book store for each book sold. The fee paid to the book store is 25% of the listed selling price. Required a. Assuming book sales of 240,000 units, prepare an Income Statement for year-end December 31, 20x1 using Contribution Income format. b Using your schedule from a., answer the following: I. What is the contribution to profits (and covering fixed costs) from the sale of 1 book? breakeven on Jane Doe's book. $1.5 million of operating income? 2. Compute the number of copies ABC Publishing must sell to . How many copies must be sold for ABC Publishing to generate e. Analyze the sensitivity of the breakeven in units for each the following alternatives i Decreasing the fee paid to the bookstore to 20% of the listed book store price, or Increasing the normal book store listed price to $32 while keeping the book store fee at the original 25% level. Which alternative would you recommend and why? (For part c. assume that all other facts remain the same, except for the indicated change) d Given your observations, discuss the implications of the following two alternatives on per book contribution to profitability of the Jane Doe contract from the publisher's perspective: (Assume that the publisher forecasts that the book sales will exceed break-even units and that all other facts from the given information apply, except those that are changed by the alternative): Increase the fixed royalty to Jane Doe but reduce the % of sales royalty payment, or 2 Reduce the fixed royalty to Jane Doe but increase the % of sales royalty payment to her Conceptually, which alternative d1. or d2. would you recommend and why (in answering this question consider the implication of a company's operating leverage on its ability to generate profits)

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