Question

You are a newspaper publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $700,000 per month, and you have contractual labor obligations of $1,250,000 per month that you can’t get out of. You also have a marginal printing cost of $0.25 per paper as well as a marginal delivery cost of $0.10 per paper.

a. If sales fall by 20 percent from 1,000,000 papers per month to 800,000 papers per month, what happens to the AFC per paper?

it ___ from ___ per paper to ___ per paper.

b. What happens to the MC per paper?

c. What happens to the minimum amount that you must charge to break even on these costs?

it ___ from ___ per paper to ___ per paper.

Answer 1

a> The fixed cost is the sum of contractual labor organization and rental cost = 700,000+1,250,000 = 1,950,000

Thus, the average fixed cost was 1,950,000/1,000,000 = $1.95

Thus, the average fixed cost is 1,950,000/800,000 = $2.44

it increased from $1.95 per paper to $2.44 per paper. (Ans)

b> The MC of the paper does not change as the marginal delivery cost and marginal printing cost are constant.

c>

The MC is 0.25+0.10=$0.35

For breakeven, there is no profit, so 1,000,000*(p-0.35)=1,950,000

p=1.95+0.35=2.3

For breakeven, there is no profit, so 800,000*(p-0.35)=1,950,000

p=2.44+0.35=2.79

it increased from $2.3 per paper to $2.79 per paper. (Ans)