Problem 1: You Are A Newspaper Publisher In The Middle
Problem 1you Are A Newspaper Publisher You Are In The Middle Of A One
Problem 1you Are A Newspaper Publisher You Are In The Middle Of A One
PROBLEM 1 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?
Paper For Above instruction
When analyzing the impact of a decline in sales volume on operational costs and pricing strategies, it’s essential to understand the components of average fixed costs (AFC), marginal costs (MC), and the break-even point for a newspaper publisher. Given the scenario, we will examine each aspect to determine the effects of a 20% decrease in sales from 1 million to 800,000 papers monthly.
Fixed and Variable Costs Overview
The fixed costs in this case include the monthly rental fee of $500,000 and the contractual labor obligations of $1 million, summing up to a total fixed expense of $1.5 million per month. These costs do not change with the number of papers printed. The variable costs include the printing cost of $0.25 per paper and the delivery cost of $0.10 per paper, totaling $0.35 per paper.
Effect on Average Fixed Cost (AFC) per Paper
The AFC is calculated by dividing total fixed costs by the number of papers sold: AFC = Fixed Costs / Quantity. At an initial sales volume of 1 million papers, the AFC is:
AFC = $1,500,000 / 1,000,000 = $1.50 per paper
When sales decline to 800,000 papers, the AFC becomes:
AFC = $1,500,000 / 800,000 = $1.875 per paper
Thus, the AFC per paper increases from $1.50 to $1.875, reflecting a higher fixed cost allocation per paper due to reduced sales volume.
Effect on Marginal Cost (MC) per Paper
The marginal cost per paper remains constant at $0.35 regardless of sales volume because it comprises fixed variable costs—printing and delivery—that are incurred with each additional paper printed, independent of the total number sold.
Therefore, MC per paper stays steady at $0.35 with the reduction in sales volume.
Break-Even Price Calculation
The minimum price to break even covers the average total cost (ATC), which includes AFC and variable costs per paper. At 1 million papers:
ATC = AFC + variable costs = $1.50 + $0.35 = $1.85 per paper
At 800,000 papers:
New AFC = $1.875; ATC = $1.875 + $0.35 = $2.225 per paper
The minimum price to break even after sales decline must be at least equal to the new ATC, which is approximately $2.225 per paper. Charging less would result in losses, while charging more is necessary if aiming for profit. Consequently, the publisher must set a minimum price of about $2.23 per paper to cover costs after a 20% sales decrease.
In conclusion, a 20% drop in sales increases the AFC per paper from $1.50 to approximately $1.87 and alters the break-even price to about $2.23 per paper, assuming costs remain constant per unit. The marginal cost remains unchanged at $0.35 per paper. This scenario highlights the importance of managing fixed costs and pricing strategies to maintain profitability amidst fluctuating sales volumes.
Problem 2 Assume that the cost data in the following table are for a purely competitive producer:
| Total Cost | Average Cost | Average Variable Cost | Average Fixed Cost | Marginal Product | Fixed Cost |
|---|---|---|---|---|---|
| $60.00 | $45.00 | $42.50 | $72.00 | 40.00 | $37.50 |
| $60.00 | $37.00 | $49.00 | |||
| $57.00 | $47.57 | $38.57 | |||
| $50.00 | $46.50 |