Question

Eastman Publishing Company is considering publishing an electronic textbook about spreadsheet applications for business. The fixed cost of manuscript preparation, textbook design, and web-site construction is estimated to be $155,000. Variable processing costs are estimated to be $6 per book. The publisher plans to sell single-user access to the book for $47.

Through a series of web-based experiments, Eastman has created a predictive model that estimates demand as a function of price. The predictive model is demand = 4,000 - 6p, where p is the price of the e-book.

(a)	Build a spreadsheet model to calculate the profit/loss for a given demand. What is the demand?
(b)	Use Goal Seek to calculate the price that results in breakeven. If required, round your answer to two decimal places.
	$
(c)	Use a data table that varies price from $50 to $400 in increments of $25 to find the price that maximizes profit.
	If Eastman sells the single-user access to the electronic book at a price of $ , it will earn a maximum profit of $ .

Answer 1

This is the solution for part (a):

Given, 1) demand function, demand = 4000 - 6p, where 'p' is price of e-book. 2) Price of e-book - $47. 3) Fixed costs = $ 1,55,000 4) Variable processing cost = $6 per book. Solution : (a) i) Let demand be ď & d = 4000 - 6p » d = 4000 -6(47) {... p = price = $47} = d = 4000 -282 id = 3718 books Therefore , demand of e-books - 3718. il calculation of Profit I loss for given demand, Profit - Sales - (Fixed costs + Variable processing cast) - (3718 x $47) - ($155,000 + ($6X3718) - $174746 - [$ 155000 + $ 22,308] = $ 174,746 - $177,308 =(-) $ 2562 : Costs are more than sales price :: loss on given demand = $ 2562.

This is the solution for part (b)

(6) Break-even point is a point where the company neither f earno profit nor faces loss on a given products sale. In other words, the sales price (Revenue) is equal to the costs inccurred (Expenses). calculation of Break-even sales Price - Total costs incurred for a particular Price () - Demand (in units) fixed costs + Variable costs Demand $ 155000 + $6 x 3718 demand 3718 = $ 155000 + $ 22308 3718 = $ 177308 3718 = $ 47.69 price Break-even for e-book is $47.69 Therefore,

(c) Table showing price that maximizes profit

Price per e-book ($)	Total Revenue ($) (1)	Total Cost ($) (2)	Profit ($) (3=1-2)
50	185900	177308	8592
75	278850	177308	101542
100	371800	177308	194492
125	464750	177308	287442
150	557700	177308	380392
175	650650	177308	473342
200	743600	177308	566292
225	836550	177308	659242
250	929500	177308	752192
275	1022450	177308	845142
300	1115400	177308	938092
325	1208350	177308	1031042
350	1301300	177308	1123992
375	1394250	177308	1216942
400	1487200	177308	1309892

Therefore, the Maximum profit will be earned at the price of $400 per e-book.