If a Bookstore sells paperback books for $7 each and the variable cost
per book is $5. If the current annual sales of 200,000 books,and the
publisher is just breaking even. It is estimated that if the authors'
royalties are reduced, the variable cost per book will drop by $1.What
would be the authors' royalties if  reduced and sales remain constant;
how much more money can the publisher put into advertising (a fixed
cost) and still break even??

Hi csalmon74!!



The point at which EBIT = 0 is the break-even level of sales. This means that:

0 = Revenues - Variable costs - Fixed costs =
  = 200,000*$7 - 200,000*$5 - Fixed costs =
  = $400,000 - Fixed costs

Then:
Fixed costs = $400,000

Fixed costs includes costs like advertising. so if the authors'
royalties is reduced with the result of the variable costs per book
dropped by $1 the new variable costs per book will be $4 the new Break
Even equation will be:

0 = Revenues - Variable costs - Fixed costs =
  = 200,000*$7 - 200,000*$4 - Fixed costs =     (sales remain constant)
  = $600,000 - Fixed costs

Then:
Fixed costs = $600,000

At this new break-even point we have $200,000 more available for fixed
costs, that can be used in advertisement.


I hope that this helps you.
Feel free to request for a clarification if you need it.


Regards.
livioflores-ga