The profit/loss for a given demand
DemDeac 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 $150,000. Variable processing costs are estimated to be $7 per book. The publisher plans to sell single-user access to the book for $50.
a. Build a spreadsheet model to calculate the profit/loss for a given demand. What profit can be anticipated with a demand of 5,000 copies? (2 pts)
b. Use a data table to vary demand from 1,000 to 8,000 in increments of 500 to assess the sensitivity of profit to demand. (0.6 pts)
c. Use Goal Seek to determine the access price per copy that the publisher must charge to break even with a demand of 5,000 copies. (0.4 pts)
Consider the following scenarios:
Scenario 1 Scenario 2
Variable Cost/Book $8 $10
Access Price $50 $55
Demand 3,500 2,000
For each of these scenarios, the fixed cost remains $150,000.
Use Scenario Manager to generate a summary report that gives the profit for each of these scenarios.
d. Which scenario yields the higher profit? (0.2 pt)
e. Which scenario yields the lower profit? (0.2 pt)
Through a series of web-based experiments, DemDeac has created a predictive model that estimates demand as a function of price. The predictive model is Demand = 5,000 – 6p where p is the price of the e-book.
f. Update your spreadsheet model to take into account this demand function. (1 pts)
g. Use Goal Seek to calculate the price that results in breakeven. (0.2 pt)
h. Use a data table that varies price from $50 to $500 in increments of $50 to find the price that maximizes profit. (0.4 pts)
Sample Solution
The spreadsheet model below can be used to calculate the profit/loss for a given demand of the electronic textbook:
Fixed Cost | Variable Cost | Revenue | Profit/Loss
$150,000 | $7 per book | $50 per book|=SUM(B1-B2*B3)
With a demand of 5,000 copies, the anticipated profit is $140,000. Through using a data table to vary demand from 1,000 to 8,000 in increments of 500 it is possible to assess the sensitivity of profit to changes in demand and see how this affects overall profits or losses. This data shows that as number of books purchased increases so does the total revenue generated but at same time variable processing costs also increase resulting an eventual decrease in total profits as amounts higher than 4500 become increasingly less viable. For example when looking at 6500 copies we can clearly see that while revenues have increased significantly compared to 5000 copies they are still not enough cover growing cost incurred due varying processing fees.
