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 $O.25 per paper as well as a marginal delivery cost of $0.10 per paper. nstructions: 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? t rises from per paper to per paper. b. What happens to the MC per paper? C does not change C.What happens to the minimum amount that you must charge to break even on these costs? t increases per paper to from per paper

Solution

Req a: Sales Sales Ssales unit: 1,000,000 800,000 Fixed cost: Rental cost of factory 600000 600000 Contractual labour obligation 1250000 1250000 Total fixed cost 1850000 1850000 Divide: Sales units 1000000 800000 Average fixed cost 1.85 2.3125 AFC rises from 1.85 per paper to 2.3125 per paper Req b: MC per paper does not change. It rermians at $ 0.35 per paper (i.e. 0.25+0.10) Req c: Minimum price: Sales Sales Ssales unit: 1,000,000 800,000 Average fixed cost 1.85 2.3125 Marginal cost per paper 0.35 0.35 Minimum Break even price 2.2 2.6625 It increases from $ 2.20 per paper to $ 2.6625per paper