Question

Rock Inc. has three divisions, Granite, Lime and Nina. All fixed costs are unavoidable. Following is the income statement for the previous year:

a. What would Rock's profit margin be if the Lime division were dropped?
b. What would Rock's profit margin be if the Nina division were dropped?

Answer 1

To calculate WipeOut Ski Company's profits or losses, subtract total costs from the revenue of 5 units sold at $25 each. Comparing average cost per unit to the selling price indicates profitability. A marginal unit adds to profits if its sale revenue exceeds production cost.

Step-by-step explanation:

The student question pertains to a hypothetical scenario for WipeOut Ski Company, and we are asked to calculate the company's profits or losses given that it produces and sells 5 units at a price of $25 each. To determine profits or losses, we would subtract the total costs from the total revenue. If WipeOut Ski Company's total costs are lower than $125 ($25 x 5 units), the company will realize a profit; if costs are higher, it will incur losses.

To quickly assess profitability based on average cost, compare the average cost per unit to the selling price per unit. If the average cost is less than $25, the company is profitable; if it's more, the company is losing money. Lastly, a marginal unit adds to profits if the revenue from selling one additional unit exceeds the cost of producing that unit.