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 $600,000 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.

Instructions: Round your answers to 2 decimal places.

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

b. What happens to the MC per paper? (Click to select)MC changesMC does not change.

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

     It (Click to select)decreasesincreases from $ per paper to $ per paper.

References

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Worksheet

Solution

a)

F C = $600,000+ $1,250,000=1,850,000.
AFC (Average Fixed Cost) will change from 1,820,000/1,000,000=1.85 to 1,850,000/800,000=2.31.

b)

MC does not change.( MC given as constant)

C)

Now Average Fixed cost is = 2.31

Breakeven = 2.31 + 0.35 (0.25+0.10)