Reference no: EM13607248

The university bookstore sells both new and used textbooks. New textbooks are sold to students at the publisher's suggested retail price and are purchased from publishers for 75% of the suggested retail price. The university bookstore also incurs additional variable costs in selling a new textbook. Variable selling costs amount to 5% of the publisher's suggested retail price. The university bookstore sells used textbooks for 75% of the price of a new textbook. However, the university bookstore can purchase a used textbook for 25% of the suggested retail price of a new textbook. Variable selling costs (in dollars per textbook) are the same for both new and used textbooks. The university bookstore's annual fixed costs amount of $360,000.

A. If used books account for 40% of revenue, what is the university bookstore's breakeven revenue? (Hint: To calculate breakeven revenue, you will need to pick a number for the price of a new book. Any number will do. Why?)

B. When students purchase a textbook for a course, they purchase either a used book or a new book, but not both. On average, would the university bookstore prefers to sell a student a new textbook or a used textbook? Why?

C. The university bookstore has decided that for fairness reasons, it should price used textbooks so that the contribution margin (dollars contributed profit) per used book is the same as the current contribution margin on the new book. To accomplish this objective, what would the price of a used textbook be as a percentage of the price of the new textbook?