You are a magazine publisher. You are midway through a one—year rental contract for your factory that requires you to pay $600,000 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 oust of $$1.75 per magazine as well as a marginal delivery cost of $$1.40 per magazine. Suppose sales fall by 20 percent from 1,000,000 magazines per month to 800,000 magazines per month. The average ?xed cost per magazine V from $ per magazine In $ per magazine. (Enter your responses rounded to M0 decimal places.)

 

 

The average fixed cost per magazine increased from $1.60 per magazine to $2.00 per magazine.

To get the average fixed cost, the formula used is

The Average fixed cost = The Total fixed cost / The Total output produced.

Fixed costs in this case are 2; The monthly rent and The monthly labor requirements

Total fixed cost = The monthly rent + The monthly labor requirements

Given

The monthly rent =600,000

The monthly labor requirements = 1,000,000

= 600,000 + 1,000,000

= $1,600,000

To get the change in average costs, we have to calculate the average fixed cost before and after the reduced sales

Average fixed cost before sales reduces

The Average fixed cost = The Total fixed cost / The Total output produced.

Where

Total fixed cost = $1,600,000

Total output produced = $1,000,000

= $1,600,000 / $1,000,000

= $1.60

Average fixed cost after sales reduces

The Average fixed cost = The Total fixed cost / The Total output produced.

Where

Total fixed cost = $1,600,000

Total output produced = $800,000

= $1,600,000 / $800,000

= $2.00

Therefore, the average fixed cost before sales reduced was $1.6 and after sales reduced, average fixed cost was $2. You realize that the average fixed cost increased from $1.6 to $2.