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 labor obligations of $1 million per month that you can't get out of. You also have a marginal printing cost 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 800,000 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?

Answer 1

Answer:

It will charge $ 2.23 per papper to break even at 800,000 units

Explanation:

fixed cost:

manufacturing cost:   500,000

labor fixed cost:       1,000,000

variable printing cost: 0.25

variable delivery cost: 0.10

    total variable cost:  0.35

At which selling price the company break-even at 800,000 papers sales per month:

$\frac{Fixed\:Cost}{Contribution \:Margin} = Break\: Even\: Point_{units}$

$\frac{1,500,000}{Contribution \:Margin} = 800,000$

Contribution Margin Ratio: 1,500,000/800,000 = 1.875

Each units must contribute 1.875 dollars to payup the fixed cost.

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

S - 0.35 = 1.875

S = 1.875 + 0.35 = 2.225

As it cannot charge half-cent we will round up:

At 2.23 cent per papper the company will break even.