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 $1,000,000 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)falls/rises 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

Answer 1

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?

AFC rises from $1.70 per paper to $2.13 per paper

b. What happens to the MC per paper?

marginal cost (MC) does not change

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

the minimum sales price should increase from $2.05 per paper to $2.48 per paper

Step-by-step explanation:

total fixed costs = $700,000 (rent) + $1,000,000 (labor) = $1,700,000

variable cost per unit = $0.25 + $0.10 = $0.35 per unit

the average fixed cost (AFC) per paper = $1,700,000 / 1,000,000 papers = $1.70 per unit

if sales fall to 800,000, AFC per paper = $1,700,000 / 800,000 papers = $2.125 per unit