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 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. 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 these costs?

Instructions are listed below.

Explanation:

Giving the following information:

Rental contract= $500,000 per month

Contractual labor obligations= $1 million per month

Marginal printing cost= $0.25 per paper

The marginal delivery cost= $0.10 per paper.

Sales= 800,000 papers

Average fixed cost= total fixed cost/ total number of units

Average fixed cost= 1,500,000/800,000= $1.875 per paper

The marginal cost per paper= unitary variable cost

The marginal cost per paper= 0.25 + 0.10= $0.35

To calculate the selling price per paper, we need to use the following formula:

Break-even point= fixed costs/ contribution margin

800,000= 1,500,000/ (selling price - 0.35)

selling price= x

800,000x - 280,000= 1,500,000

800,000x= 1,780,000

x= $2.225

To confirm:

Income= 800,000*(2.225 - 0.35) - 1,500,000= 0

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