Cost-Volume -Profit Analysis 105directly to them. Until that traffic happens, the Web designers will develop
links with all the major sites that might be interested.”
“How does that work?”
“ Well, your newest project is a Florida bird book for all the retired baby
boomers down there, right? So we develop what is called a link with the
Audubon’s Web site and maybe AARP and the Florida Tourism Bureau. When
people see your book on those sites, they click on a link and get transferred to
our site. If they buy the book, we pay the site a 10% royalty.”
“Does that mean I spend all my days, assuming we are successful, mailing
books all over the world? That doesn’t interest me.”
“No. I also talked with logistics companies like UPS and FedEx. They will
do all of that. When we sell a book, we just notify them electronically. They
work with the printer to obtain the book and with the credit card company to
get paid, and they ship it. They even collect the money, pay everyone involved
with the sale, and electronically deposit the remainder in your account. They
would charge about $10 per book for all of this, assuming we can guarantee a
certain minimal volume.”
“Now that sounds like your parents are getting their money’s worth. Have
you summarized all of this?”
“Sure have. You’re still thinking about a price of $80 for this book?”
“My others have sold for that, and I think the demand for this might even
be greater. So $80 is a good assumption.”
“Okay. First, all business models have only two types of costs, variable
and fixed. Each is defined by the behavior of the total cost function. Variable
costs are those that increase proportionately with volume—basically, the more
books we sell the higher these total costs will be. They can be expressed either
on a per-unit basis or as a percentage of the selling price. Notice we have both
types. Our printing and logistics costs total $45 for each book sold—$35 print-
ing plus $10 logistics. Our Web-site sales referral cost of 10% and Web-design
cost of 5% for every dollar of revenue are examples of the latter kind of vari-
able cost. For the targeted price of $80, these costs come to $12 for each book
sold ($80× 15%). Note this type of variable cost is a little more complicated
than the simple $45 per book—here if we change selling price, the variable
cost will change. Given the $80 selling price, the total variable cost per book is
then $57 per unit ($45+$12). Unlike these costs, the Web-site design cost is a
mixed cost^1 and has to be broken into a variable and a fixed component. We
have already treated the 5% variable cost component. There is also a fixed
charge per year of about $100,000 if we go high-end. Note the difference in
behavior of this cost. Here the totalcost is not dependent on a volume factor
such as “books sold.” Fixed costs are often called period costs since they are
time dependent. So in summary, we have a time-dependent fixed charge of
$100,000 per year, which remains the same regardless of the number of books
sold, and a variable cost, which is better understood on a per-unit or, in this
case, per-book rate of $57. I made a graph of this—what businesspeople call
cost structure (see Exhibit 3.2).”^2