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 $1,000,000 per month that you can’t get out of. You also have a marginal printing cost of $0.35 per paper as well as a marginal delivery cost of $0.10 per paper. Instructions: Round your answers to 2 decimal places. a. If sales fall by 20 percent from 1,000,000 papers per month to 800,000 papers per month, what happens to the AFC per paper? It from $ per paper to $ per paper. b. What happens to the MC per paper? . c. What happens to the minimum amount that you must charge to break even on these costs? It from $ per paper to $ per paper.

Answer 1

Answer:

1) fixed cot increase to $1,875‬ from $1.5

2) the marginal contribution per paper do not change as the change in volume do not make a change in the variable cost nor sales price.

3)

minimum to break-even at 1,000,000 units = $1.95

at 800,000 units: $2.4375

Explanation:

rent expense 500,000

labor            1,000,000

total fixed   1,500,000

variable cost:

0.35 printing and 0.10 delivery = 0.45

Fixed cost:

1,500,000 / 1,000,000 = 1.5

new fixed cost:

1,500,000 / 800,000 = 1,875‬

to break even:

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

1,500,000 / (selling price - 0.45 variale cost) = 1,000,000

selling price: (1,500,000 + 0.45 x 1,000,000) / 1,000,000

selling price: 1.95

1,500,000 / (selling price - 0.45 variale cost) = 800,000

selling price: (1,500,000 + 0.45 x 800,000) / 800,000

selling price: 2,4375‬