Managerial Economics (Exercise)

Questions 1 to 10 should be answered on the basis of the information given below:

A leading business magazine publishing company in South Delhi is planning to launch a new
monthly issue on ‘Youth Options’ and for that it has estimated the total fixed costs at Rs 40/-
lakh, with break-up of Rs 4/- lakh for copy editing, Rs 28/- lakh for typesetting, Rs 8/- lakh
for sales promotion. Further the average variable cost for 12 issues was worked out as Rs
800/-. The annual cost break-up of the variable cost are Rs 240/- for printing and binding, Rs
80/- as office cost, Rs40/- as retailer’s commission, Rs280 as incentive discounts, and
Rs160/- as payment of article/case writer. Considering the quality of this magazine, the
annual selling price was decided at Rs1,200/- for 12 issues.

1. What is the number of magazines that need to be produced and sold to reach break-even?
What will be the total sales revenue at the break-even point?

Total no. of magazines to reach break-even - _____________________________

Total sales revenue at the break-even point - _____________________________

2. Draw the cost volume profit graph for the magazine production and sales and show the
break-even point.

3. How many magazines need to be produced and sold if the firm wishes to earn a profit of
Rs 2.40/- lakh?

Total no. of magazines to reach break-even - _____________________________

Total sales revenue at the break-even point - _____________________________

4. Draw the graph for earning a profit of Rs2.40/- lakh and show the profit.

5. Suppose after a year of good response, the publisher increased the price from` 1,200 to Rs
1,600/- while the fixed cost and average variable cost remains the same. How much sales
will be required to earn a profit of Rs 2.40/- lakh?

Total no. of magazines to reach break-even - _____________________________

Total sales revenue at the break-even point - ______________________________

6. Draw the new TC, TVC and TR curves and demonstrate the sales and profit in this new
situation.

7. Compare your answers to questions 4 and 6. What did you learn about the cost, profit and
volume analysis?

1
Assuming that there is a technological breakthrough that reduces fixed cost to `10/- lakh
per annum but the prices and average cost remains the same as in Q.1. Answer the
following questions:

8. What will be the new break even sales revenue and quantity with the new technology?

Total no. of magazines to reach break-even - _____________________________

Total sales revenue at the break-even point - _____________________________

9. At what level of sales revenue and quantity will the firm earn a profit of Rs 2.40/- lakh?

Total no. of magazines to reach break-even - _____________________________

Total sales revenue at the break-even point - _____________________________

Explain whether the risk associated with publishing has increased or decreased with the
change in technology?