Final answer:
Businesses use the contribution margin, contribution margin ratio, and operating income to determine product profitability. For a perfectly competitive firm, profit is maximized where marginal revenue equals marginal cost. Decisions on production levels are aided by comparing average cost and marginal cost to the price.
Step-by-step explanation:
Regarding the question about Willie Company and its contribution margin and operating income, and similarly the Doggies Paradise Inc. and the WipeOut Ski Company scenarios, in all cases, the core aim is to understand relationships between costs, revenues, and profits to make informed business decisions. Calculating the contribution margin, contribution margin ratio, and operating income enables businesses to determine the profitability and performance of their products or services.
For Willie Company, the contribution margin ratio is the contribution margin per unit divided by the selling price per unit. Since this involves pricing, costs, and income, it is categorized under Business. For a perfectly competitive firm like Doggies Paradise Inc., the profit maximization occurs where marginal revenue equals marginal cost, since it is important for firms to maximize profits while minimizing costs.
Knowing about average costs and marginal costs is crucial for economic decision-making. For example, in the WipeOut Ski Company, one can tell if the firm is making losses or profits by comparing the price to the average cost. If the price is lower, it indicates losses. Similarly, if the marginal cost of producing an additional unit exceeds the price, it suggests that the firm should reduce production to avoid losses.