Cost-Volume -Profit Analysis 111site reference, the 10% commission can also be avoided. I looked into the
Web-site contract, and I do think we will have to pay this charge of $2.50 per
book (5%× $50). Summing up, the variable cost per book for this special
order will be only $32.50 ($30 printing charge plus $2.50 Web-site fee)—less
than the $50 PBS is willing to pay. The end result is a $17.50 contribution mar-
gin per book for this special order. There is an incremental fixed charge of
$250 but we still will make just over $87,000 (5,000× [$50−$32.50]−$250
=$87,250). So we should think about reconsidering the offer” (see Exhibit 3.7).
Though Abbey was beginning to appreciate the complexity of this type of
analysis, all the numbers did make sense. She had only one question: “ What
happens if customers I would have sold to any way get their books this way?
Don’t I lose money?”
Stephen had done that analysis.“In the business world, we call that can-
nibalization.On every book sold through this special offer, you could poten-
tially lose the $23 contribution margin per book sold through the regular Web
site if these people would have bought any way. To solve for the potential num-
ber of regular customers that would have to be cannibalized in order for us to
lose money on this special order, follow this procedure:
Solving for x,we get
This means that if about 3,800 of the 5,000 books sold by PBS go to customers
that would have bought any way, we are indifferent to accepting this order. If
more than 3,800 would have bought any way, we lose on this special order. Do
you think 76% (3,800/5,000) of these people would buy from our Web site? I
don’t think it is any where near that. And, on the positive side, these 5,000 peo-
ple would now be advertising our Web site with your book on their coffee ta-
bles all over Florida.”
Abbey was searching for the PBS phone number before Stephen had fin-
ished the last sentence. She made a mental note to understand this “relevant
cost” analysis a bit more.
Price Discrimination
In the above special order situation, there was a legitimate reason to offer PBS
the lower price. As Exhibit 3.7 illustrates, the relevant cost analysis justified
the lower price. When offering different prices to different customers, one
must be aware of the laws regarding price discrimination. Under the federal
Robinson-Patman Act and many state laws, it is illegal to price discriminate
unless there are mitigating circumstances. One must be very careful to do a
x==$,
$
,87 250
23
3 793 customers$$,23x= 87 250