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 $600,000 per month, and you have contractual labor obligation of $1.25 million per month that you 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 million papers per month to 800,000 papers per month, what happens to the AFC per paper, the MC per paper, and the minimum amount that you must charge to break even on those cost?

Explanation / Answer

The fixed costs are: rent = 600000 labor = 1250000 Variable costs are: Printing = 0.25 Delivery = 0.10 AFC = FC/Q At Q = 1000000, AFC = (6000000+1250000)/1000000 AFC = 7.25 At Q = 800000 AFC = (6000000+1250000)/800000 AFC = 9.0625 This is an increase of 9.0625 - 7.25 = 1.8125 MC is 0.25 + 0.10 = 0.35 and does not change with the number of papers sold. The minimum amount that we must charge to break even is the average total cost. ATC = AFC + AVC AVC = MC in this case because MC is constant. If Q = 1000000 ATC = 7.25 + 0.35 ATC = 7.60 If Q = 800000 ATC = 9.0625 + 0.35 ATC = 9.4125 So, ATC increases by 9.4125 - 7.60 = 1.8125

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