You are a newspaper publisher. You are in the middle of a one-year rental contra

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 $1,250,000 per month that you can't get out of. You also heve a marginal printing cost of $0.35 per paper as wel 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? isesfrom 14 per paperto 210 er pasper. 219 per paper b. What happens to the MC per paper? MC does not change c. What happens to the minimum amount that you must charge to break even on these costs? 1.96 per paper ? 5 6 8 WE

Explanation / Answer

A.

When sale is 1000000 papers per month.

AFC = (500000+1250000)/1000000 = $1.75 per paper

When sale is 800000 papers per month.

AFC = (500000+1250000)/800000 = $2.19 per paper

So, it rises from $1.75 per paper to $2.19 per paper.

B.

MC does not change. (It is a variable cost and it is on a per paper basis)

C.

When sale is 1000000 papers per month.

At breakeven, the profit = 0 at a price of X per paper

Then,

0 = (X-.45)*1000000 – 1750000

X = 1750000/1000000 + .45 = $2.2

When sale is 800000 papers per month.

At breakeven, the profit = 0 at a price of X per paper

Then,

0 = (X-.45)*800000 – 1750000

X = 1750000/800000 + .45 = $2.64

So,

It increases from $2.2 per paper to $2.64 per paper.

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