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 $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 $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)risesfalls from $ per paper to $ per paper.

b. What happens to the MC per paper? (Click to select)MC does not changeMC changes.

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 paper.

Answer 1

a) total fixed cost = 600,000 + 1250000 = $ 1850000 when sales was 1000000 papers per month AFe = 1850000/1000000 = $ 1.85 when sales was 800000 papers per month - AFe = 1850000/800000 = $ 2.3125 almostequalto $ 2.31 Therefore AFe per paper & rises from $ 1.85 to $ 2.31 b) marginal cost is per unit cost, So me does not change e) Average variable cost is the break even - on these costs. when sales of paper = 1000000, the average variable cost = total variable cost/total quantity total variable cost = me times quantity = 0.25 times 1000000 = $ 250000 (printing cost) for delivery cost = 0.10 times 1000000 = $ 100000 total = $ 250000 + $ 100000 = $ 350000 \r\n average variable cost = $ 350000/1000000 = $ 0.35 when sales = 800000 papers average variable cost = $ 350000/800000 almostequalto $ 0.44 Therefore Break even on these cost increases from $ 0.35 to $ 0.44