You are a newspaper publisher. You are in the middle of a one-year rental contra
ID: 1214365 • Letter: Y
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 $0.25 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? Instructions: Round your answers to two decimal places. AFC per paper from $ per paper to $ per paper. What happens to the MC per paper? What happens to the minimum amount that you must charge to break even on these costs? Instructions: Round your answers to two decimal places. The amount from $ per paper to $ per paper.
Explanation / Answer
ans
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
TFC= 700000 + 1250000 =1950000
at Q=1000000
AFC = TFC/Q =1950000/ 1000000= 1.95
at Q=800000
AFC = TFC/Q =1950000/ 800000= 2.44
AFC per paper from $1.95 per paper to $2.44 per paper
What happens to the MC per paper
MC is determined by the additional cost that needs to be beared in order to produce one more unit and it is solely determined by Variable cost.
so MC here will remain same
MC= printing cost per paper + delivery cost per paper = 0.25+ 0.10 = $ 0.35 per paper
What happens to the minimum amount that you must charge to break even on these costs
breakeven is determined where ATC=AVC+AFC= Price
At Q= 1000000 ,
ATC= 1.95 +0.35 = 2.3
Price = 2.3 per paper is minimum amount that you must charge to break even
At Q= 800000 ,
ATC= 2.44 +0.35 = 2.79
Price = 2.79 per paper is minimum amount that you must charge to break even
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.