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CVP Analysis : Calculating the royalty amount per bundle

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Debbie's Book Nook sells textbook material bundles for $17.00 each, the variable cost per pack is $12.50, fixed costs for this operation are $325,000, and annual sales are 117,000 bundles. The unit variable cost consists of a $3.50 royalty payment, VR, per bundle to publishers plus other variable costs of VO = $9.00. The royalty payment is negotiable. The book store's directors believe that the store should earn a profit margin of 12% on sales, and they want the store's managers to pay a royalty rate that will produce that profit margin. What royalty per bundle would permit the store to earn a 12% profit margin on textbook material bundles, other things held constant?

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Solution Preview

Please refer attached file for better understanding of formulas used in MS Excel.

Sales Price (P)= $17.00
Target Profit Margin=12.00%

Current Royalty (VR)= $3.50
Other Variable Cost (VO)= ...

Solution Summary

Solution describes the steps to estimate the royalty per bundle that would permit the store to earn a profit margin of 12% in the given case.