You are a newspaper publisher You are in the middle of a one

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 $1,000,000 per month that you can’t get out of. You also have a marginal printing cost of $0.35 per paper as well as a marginal delivery cost of $0.10 per paper.

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?

Instructions: Round your answers to two decimal places.

AFC per paper from $ per paper to $ per paper.

What happens to the MC per paper?

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

Instructions: Round your answers to two decimal places.

The amount from $ per paper to $ per paper.

Solution

1. AFC increase from $1.70 to $2.125 per paper. (Explanation: FC = 700000 + 1000000 = 1700000. Then, 1700000/1000000 = 1.70 and 1700000/800000 = 2.125)

2. MC will not change.

3. Total costs= 1,700,000 + 0.45*800,000= $2,060,000, divided by 800,000 papers= $2.575 per paper
Before that, total costs= 1,700,000+ 0.45*1000000= 2,150,000 divided by 1,000,000= $2.15 per paper
Therefore, amount increases from $2.15 to $2.575