106 Understanding the Numbers
Abbey thought she understood. “So this structure will always be the same?”
“ With one proviso,” Stephen affirmed. “Although my chart looks the
same from zero volume to an infinite amount sold, we really should only be
talking about a smaller relevant range. Both the printer and the logistics com-
pany are assuming an annual volume of between 10,000 and 25,000 books—es-
sentially what your past books sold. Outside this range, especially on the high
side, the costs probably will change. I don’t think the printer can do much
more than 25,000 a year for us. Likewise, at greater than this volume, we would
probably have to redesign the Web site. So the cost structure could change if
we were to move outside the range.”
“Okay. So now I think I do understand what the cost structure would be
given our plans for the Web site. All that you said makes sense, and I’m sure my
new book will sell in that range. So tell me why I shouldn’t do this.”
COST-VOLUME-PROFIT ANALYSIS
“If we add a revenue line to my first exhibit,” said Stephen, “we will start to get
a better picture of the answer to this question (see Exhibit 3.3). First, you must
understand the concept of contribution margin. For us, it is simple. For every
$80 book we sell, there is a variable cost to print, sell, and deliver that book of
$57. This means that the net contribution of each book sold is $23. Does this
make sense?”
“Sure does,” Abbey answered, delighted. “This is wonderful. I was only
making $12 with my publisher, and now I can make almost double that.”
“Not quite. You forgot one thing. Contribution margin must first go to-
ward covering the fixed costs before we can realize any profit. Each year we
have to cover the Web-site designer ’s charge of $100,000. At a contribution
margin of $23 per book, it will take about 4,350 books sold to do this (see
EXHIBIT 3.2 Web site cost structure.
02004006008001,0001,2001,4001,6001,8000 5,000 10,000 15,000 20,000 25,000Dollars (thousands)UnitsRelevant range