Question

A product sells for $ 5 and has variable unit costs of $ 3. This product represents $ 20,000 in annual sales, out of a total of $ 60,000 for the company. when conducting an equilibrium analysis of various products. What is the weighted contribution of this product?

(a) 40%
(b) 33.33%
(c) $13,333
(d) 13.33%

Answer 1

The firm experiences losses of $5 at this level of quantity and output. The firm is making losses, losing $1 for each unit produced. The marginal unit is subtracting from profits and suggests reducing the quantity produced.

Step-by-step explanation:

a. Total revenues in this example will be a quantity of five units multiplied by the price of $25/unit, which equals $125. Total costs when producing five units are $130. Thus, at this level of quantity and output the firm experiences losses (or negative profits) of $5.

b. If price is less than average cost, the firm is not making a profit. At an output of five units, the average cost is $26/unit. Thus, at a glance you can see the firm is making losses. At a second glance, you can see that it must be losing $1 for each unit produced (that is, average cost of $26/unit minus the price of $25/unit). With five units produced, this observation implies total losses of $5.

c. When producing five units, marginal costs are $30/unit. Price is $25/unit. Thus, the marginal unit is not adding to profits, but is actually subtracting from profits, which suggests that the firm should reduce its quantity produced.