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 $700,000 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?

Answer 1

The average fixed cost per newspaper increased from $1.95 to $2.44

Step-by-step explanation:

To determine the average fixed costs (AFC) we must first determine the total fixed costs:

Total fixed costs = rent expense + fixed labor = $700,000 + $1,250,000

Total fixed costs = $1,950,000

When the total production was 1,000,000 newspapers per month, the AFC was = $1,950,000 / 1,000,000 newspapers = $1.95 per newspaper

When the total production decreased to 800,000 newspapers per month, the new AFC was = $1,950,000 / 800,000 newspapers = $2.44 per newspaper