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 labour obligations of $1 million 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. a. If sales fall by 20 percent from 1 million papers per month to 800,000 papers per month, what happens to the average fixed cost per paper and to the marginal cost per paper? Instructions: Round your answers to two decimal places. Average fixed cost per paper Click to select) from $ per paper to $ per paper Marginal cost per paper Cick to select) b. 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 (Click to select) from $ per paper to $ per paper

Answer 1

a) TFC = 500000+1000000 = 1500000

When sales falls

AFC per paper increases from 1500000/1000000 = 1.5 to 1500000/800000 = 1.86

MC per papaer will be unaffected and remains the same

b) At breakeven, TR=TC

When sales = 1000000, TFC = 1500000 and TVC = 0.25*1000000+0.10*1000000 = 350000

TC = TFC+TVC = 1500000+350000 = 1850000

The minimum amount is 1850000/1000000 = 1.85

When sales - 800000, TFC = 1500000, TVC = 0.25*800000+0.10*800000 = 280000

TC = 1500000+280000 = 1780000

The minimum amount is 1780000/800000 = 2.23

so, the maount increases from 1.85 per paper to 2.23 per paer