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 $500,000 per month, and you have contractual labor obligations of $1 million 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 million papers per month to 800,000 papers per month, what happens to the AFC per paper

Answer 1

The AFC per paper will increase when sales fall by 20 percent because the total fixed costs will be spread over a smaller number of papers.

Step-by-step explanation:

To calculate the average fixed cost (AFC) per paper, we need to divide the total fixed costs by the number of papers produced. In this case, since the rental contract and labor obligations are fixed costs, they remain the same regardless of the number of papers produced.

Therefore, the AFC per paper will increase when sales fall by 20 percent because the total fixed costs will be spread over a smaller number of papers.

Let's calculate the AFC per paper:

AFC = Total Fixed Costs / Number of Papers

Initially, the total fixed costs are $1,500,000 ($500,000 for the factory rental and $1,000,000 for labor obligations).

If sales fall by 20 percent from 1 million papers per month to 800,000 papers per month:

AFC per paper = $1,500,000 / 800,000 papers = $1.875 per paper.

Answer 2

If sales fall by 20% AFC raises 38 cents per paper, i.e. a 25% increase in AFC.

Step-by-step explanation:

To find the average fixed cost (AFC), we have to sum all fixed costs and divide it by the amount of units produced. Fixed costs are those that don't depend on how much is produced, in this case, rental and labor cost don't depend on output, as you can neither move to a cheaper place nor decrease labor obligations even if the factory had no output (newspapers printed).

`AFC=\frac{\mbox{Fixed costs}}{\mbox{Printed papers}} \\\\AFC_{\mbox{original sales}} =(\$1500000)/(1000000 papers)=1.5(\$)/(paper) \\\\AFC_{\mbox{original sales}} =(\$1500000)/(800000 papers)=1.875 (\$)/(paper)`

`\mbox{Porcentual difference}=\frac{\mbox{difference between AFC}}{\mbox{original AFC}} \\\\\mbox{Porcentual difference}=(1.875-1.50)/(1.50)*100=(0.375)/(1.5) *100=25\%`

We can see that as the output reduced, AFC rose 38 cents per paper or a 25% increase in AFC.