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 obligations of $1.25 million per month that you cant get out of. You also have a marginal price range of $.25 per paper as well as a marginal delivery cost of $.10 per paper. If sales fall by 20 percent from 1 million papers per month to 800,000paper per month what happens to the AFC per paper, the MC per paper, and the minimum you must charge to break even on these costs?

Please us the numbers given to work the answer.

Explanation / Answer

AFC = Rental+ Labour cost +price of paper +delivering cost Now 800000 papers sold So price of paper = 800000*0.25 = 200000dollars Delivering cost = 800000*0.1= 80000dollars So total cost incurred = 600000 +1250000+(200000)+80000 =$2130000 for 1000000 paper price of paper = 1000000*0.25=$250000 delivering cost=1000000*0.1=$100000 So total cost incurred= 600000 +1250000+100000+250000 =$2200000 Initial cost of paper incurred(for sale of 1000000 papers) =2200000/1000000 =$2.2 Initial cost of paper incurred(for sale of 800000 papers) =2130000/800000 =$2.6625 (equation a) MC =$(2.6625-2.2)=$0.4625 Break even cost to be charged = $2.6625 (from equation a)

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