BROCKWAY & COATES

Problem in publication of
Senators Autobiography

INTRODUCTION

Publication of Autobiography of Senator Murphy

Senator Murphy
82 Yrs Old
Served in US house representatives for 16 yrs
Planned to retire before his expiry term during his 40th anniversary of
his becoming a sentor
Widely respected influence voice in Capitol Hill
Planned to write an Autobiography
B & C probed him for the likely content of Serving Time
He expects to receive 500,000 Dollars to sign the deal and 500,000
dollars upon delivery of Manuscript

DISCUSSION AT B & C

Critical Points

Sales Expected
Amount to be paid to Murphy
The book which is to be released is an election year.
Age of Senator Risk of old age
Whether the contents of the book would be exciting or not
Uncertainty of sales Amount ( 30$ at Retail stores, $15 at
Wholesale ) )
30% probability sales of 1,000000
40% probability sales of 400,000
30% probability sales of 100,000

CRITICAL POINTS ( CONTD )

80% probability that Murphy will deliver the manuscript
$ 500,000 payable before the delivery of manuscript
25% chance that the manuscript would be so poor, that is the
company wont publish it, which means a loss of 1 million to B & C

COST
Cost Involved in Publishing the book:
Writing, Editing, proof reading, permissions, Photographs etc ( Will
incur even if Company do not publish the book ): $ 100,000

$50,000 if Murphy fails t deliver the manuscript

Printing

Cost: $4 per copy ( minimum copies 100,000 )

Cost of Camera ready proof: $ 50,000
Distribution Cost: 25 Cents per copy
Marketing Cost: 40% of wholesale price But already sales force is
there, so incremental costs would be 5% of wholesale price.
Advertisement: $500,000

CALCULATION OF SALES

30% probability sales of 1,000,000

40% probability sales of 400,000
30% probability sales of 100,000
Sales = 30% x 1000000 + 40% x 400000 + 30% x 100000 = 490000
copies
Income = 490000 x $15 = $ 73,50,000
If the manuscript is not good,75% prob that we will publicsh
the book
So new sales = 7350000 x 75% = 5512500
Because of huge margin to Wholesale and retails, here there
is no sales return

CALCULATION OF COST
Payable to Murphy : 500000 + (.80 x 500000) =
$900,000
Editorial Services: $1, 50,000
Printing Cost: 490000 x 4 = $ 1, 960,000
Distribution Cost: 490000 x .25= $122,500
Marketing Cost: $ 367500
Advt Cost: $ 500000

Total Costs: $ 3,10,0000

Prob:.75, TotalVC = Per Unit: 6.33
Fixed Cost: 900000

1 Q WHAT IS THE EXPECTED (PROBABILITY WEIGHTED

AVERAGE) CONTRIBUTION TO B&C IF IT SIGNS THE DEAL
WITH SENATOR MURPHY?
Sales =5512500
Variable Costs = 3330269
5512500 3330269 = 2182231
Cont Per unit = 2182231 /367500 = 5.93

2 Q WHAT IS THE EXPECTED CONTRIBUTION

FOR B&C IN CASE OF THE ROYALTY DEAL?
Cost: Contribution = 3187500
FC : 400000
Profit: 2787500
Profit / book = 5.68
To cover 500000 Initial adv amount: 500000 / 5.68 = 87892
Royalty Paid Books: 367500 87892 = 279608
Royalty: 279608 x 2.5= 699019
Cont: 5512500 3024019 = 2488481
Per unit: 6.77

3Q WHAT IS THE EXPECTED INCOME FOR MURPHY IN THE

TWO DEALS PUT FORWARD BY B&C ?
Expected Value to Senator Murphy under:
Flat Fee
500000 + (500000 x .8) = 900000

Royalty Deal
500000 x .8= 400000, + 699019 = 1099019

4Q WOULD YOU EXPECT THE BEST PRICE

(RETAIL PRICE UNDER FLAT DEAL RATE) FOR
B&C UNDER THE ROYALTY DEAL TO BE

A)Ans
HIGHER
OR LOWER THAN $30?
B)

Implications of such a price change for senator

Murphy:

Ans. Reduction in price, sales will increase and Senator will get
more royalty

Q5.(A) How many books B&C should order from the printer under the
flat deal and royalty deal? Which deal would lead to the larger order
from the printer?
Answer
Under Fee Flat Deal - 490,000 copies, provided that all other
information provided for the purpose of this case will not change.
Under the royalty deal We expect as a group that B&C should order
slightly more than 490,000 copies.
It is because it will ,cover the additional cost incurred due to royalty
fee as compared to the flat deal rate.

 B)

Does Senator Murphy have any reason to care whether B&C

can order on as needed-basis or not?
Ans Senator Murphy has nothing to worry about the modality
of the publication so as the royalty deal pays him the royalty fee
for the copies sold not printed.