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 $500,000 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 $0.35 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 (Click to select)fallsrises from $  per paper to $  per paper.

What happens to the MC per paper? (Click to select)MC does not changeMC changes

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 (Click to select)increasesdecreases  from $  per paper to $  per paper.

Solution

Total fixed costs per month = Rent + contractual labor = 500,000 + 1,250,000 = 1,750,000

Total marginal costs = 0.35 + 0.10 = 0.45 per paper

AFC = Total fixed cost/Sales
Initial AFC = 1,750,000/1,000,000 = $1.75 per paper
AFC After sales decrease = 1,750,000/800,000 = $2.1875 ~ $2.19 per paper

AFC rises from $1.75 to $2.19 per paper

MC per paper does not change and remains fixed at $0.45 per paper.

Breakeven:
Total costs = total revenue.
Let the initial selling price be x.
Then,
(1750000 + 0.45 * 1000000) = 1000000x
x = 1.75 + 0.45 = $2.2

Let the selling price after sales fall be y.
Then,
(175000 + 0.45 * 800000) = 800000y
y = 2.19 + 0.45 = $2.64

Minimum breakeven charge increases from $2.2 to $2.64 per paper