Question

You are a newspaper publisher. You are in the middle of a one-year factory rental contract that requires you to pay $700,000 per month, and you have contractual salary obligations of $1,000,000 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 $010 per paper. Instructions: Enter your answers rounded to two decimal places. a. If sales fall by 20 percent from 1,000,000 newspapers per month to 800,000 newspapers per month, what happens to the AFC per newspaper? AFC per newspaper from $ to $

Answer 1

The average fixed cost per newspaper increases when sales fall by 20 percent.

Step-by-step explanation:

Fixed costs are costs that remain constant regardless of the level of production or sales, while variable costs vary with the level of production or sales. In this case, the rental factory cost and salary obligations are fixed costs, while the marginal printing cost and delivery cost are variable costs.

Given that sales fall by 20 percent from 1,000,000 newspapers per month to 800,000 newspapers per month, the total cost of production will remain the same. However, the average fixed cost (AFC) per newspaper will increase because the fixed costs are spread over a lower number of newspapers.

Using the formula AFC = Total Fixed Costs / Quantity, we can calculate AFC per newspaper before and after the sales decrease:

Before:

AFC = Total Fixed Costs / Quantity = $1,700,000 / 1,000,000 = $1.70

After:

AFC = Total Fixed Costs / Quantity = $1,700,000 / 800,000 = $2.13

Therefore, the AFC per newspaper increases from $1.70 to $2.13 when sales fall by 20 percent.