The fixed costs are: Development, $35,000; Typesetting, $18,500; Depreciation, $9,320; General and Administrative, $7,500; and Miscellaneous Fixed Costs, $4,400, for a total of $74,720 in fixed costs. The variable costs are: Printing and Binding, $5.00 per copy ($30,000 ÷ 6,000 copies); Sales Commissions, $.90 per copy (2% of $45); Bookstore Commissions, $11.25 per copy (25% of $45); and Author Royalties, $4.50 per copy (10% of $45). Since the desired operating earnings is a percentage of revenue, we treat that like another variable cost. That is $9.00 per copy (20% of $45). Total variable costs per unit, including the desired operating earnings, are $5.00 + $.90 + $11.25 + $4.50 + $9.00 = $30.65. The unit contribution margin we will use, then, is $45.00 ? $30.65, which is $14.35. Dividing the total fixed costs of $74,720 by the unit contribution margin of $14.35, we get 5,206.97, or 5,207 units that need to be sold in order to generate operating earnings before interest and taxes of 20% on sales. At this sales level, the fixed costs are covered and an additional 20% of sales revenue is earned, over and above the expenses.
This answer results from incorrectly including Printing and Binding as a fixed expense instead of a variable expense.
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This is not the correct answer. Please see the correct answer for an explanation. We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.
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