The Portable MBA in Finance and Accounting, 3rd Edition

108 Understanding the Numbers

alternatives (see Exhibit 3.5). ‘Stay with the publisher ’ shows that you make
$12 for every book sold. ‘Sell through the Web site’ is a bit more involved in
that it shows that you first must cover your fixed cost before making any profit.
Note that they intersect at about 9,100 books sold, which means that you would
be indifferent to which business model you chose at this volume of books sold.^3
But at less than the 9,100 you should stay with your publisher; at greater than
that volume, build your own Web site. At the 20,000 books-per-year level you
said you are sure this project will hit, you make $240,000 per year (20,000×
$12 royalty per book) if you stay with your publisher, and $360,000 with the
Web site (20,000 × [$80−$57]−$100,000 fixed costs). Another way to think
about this is that if we set up our own Web site there is an additional variable
cost for each book we sell—the $12 we could have made from the publisher
(see Exhibit 3.6). This is called an opportunity cost.It is a relative measure—

EXHIBIT 3.5 Profit chart.

5,000 10,000 15,000 20,000 25,000

Dollars (thousands)

Units

Stay with publisher

Sell through Web site

–200

–100

0

100

200

300

400

500

600

EXHIBIT 3.6 Revised Web site CVP analysis.

0 5,000 10,000 15,000 20,000 25,000

Dollars (thousands)

Units

Total revenue line

Revised total cost line

$69x + $100,000

Break-even now

indifference point

0

500

1,000

1,500

2,000

2,500