You are a newspaper publisher. you are in the middle of a one-year rental contract for your factory that requires you to pay $700,000 per month, and you have contractual labor obligations of $1,250,000 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. 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?

The average fixed cost per newspaper increased from $1.95 to $2.44

Explanation:

To determine the average fixed costs (AFC) we must first determine the total fixed costs:

Total fixed costs = rent expense + fixed labor = $700,000 + $1,250,000

Total fixed costs = $1,950,000

When the total production was 1,000,000 newspapers per month, the AFC was = $1,950,000 / 1,000,000 newspapers = $1.95 per newspaper

When the total production decreased to 800,000 newspapers per month, the new AFC was = $1,950,000 / 800,000 newspapers = $2.44 per newspaper