Question

Required information [The following information applies to the questions displayed below.] Iguana, Incorporated, manufactures bamboo picture frames that sell for $25 each. Each frame requires 4 linear feet of bamboo, which costs $3.00 per foot. Each frame takes approximately 30 minutes to build, and the labor rate averages $15 per hour. Iguana has the following inventory policies: - Ending finished goods inventory should be 40 percent of next month's sales. - Ending direct materials inventory should be 30 percent of next month's production. Expected unit soles (frames) for the upcoming months follow: Variable manufacturing overhead is incurred at a rate of $0.50 per unit produced. Annual fixed manufacturing overhead is estimated to be $6,000 ( $500 per month) for expected production of 5,000 units for the year. Selling and administrative expenses are estimated at $550 per month plus $0.70 per unit sold. Iguana, Incorporated, had $11,100 cash on hand on April 1. Of its sales, 80 percent is in cash. Of the credit sales, 50 percent is collected during the month of the sale, and 50 percent is collected during the month following the sale. Of direct materials purchases, 80 percent is paid for during the month purchased and 20 percent is paid in the following month. Direct materials purchases for March 1 totaled $5,500. All other operating costs are paid during the month incurred. Monthly fixed manufacturing overhead includes $350 in depreclation. During April, Iguana plans to pay $2.000 for a plece of equipment. Varlable manufacturing overhead is incurred at a rate of $0.50 per unit produced. Annual fixed manufacturing overhead is estimated to be $6,000 ( $500 per month) for expected production of 5,000 units for the year. Selling and administrative expenses are estimated at $550 per month plus $0.70 per unit sold. Iguana, Incorporated, had $11,100 cash on hand on April 1. Of its sales, 80 percent is in cash. Of the credit sales, 50 percent is collected during the month of the sale, and 50 percent is collected during the month following the sale. Of direct materials purchases, 80 percent is paid for during the month purchased and 20 percent is paid in the following month. Direct materials purchases for March 1 totaled $5,500. All other operating costs are paid during the month incurred. Monthly fixed manufacturing overhead includes $350 in depreciation. During April, Iguana plans to pay $2,000 for a plece of equipment. Required: Compute the following for Iguana, Incorporated, for the second quarter (April, May, and June).

Answer 1

Total revenue, marginal revenue, total cost, and marginal cost are calculated for each output level of an aquarium sold by AAA Aquarium Co. The profit-maximizing quantity is determined by finding the output level where marginal revenue equals marginal cost. Economies of scale also contribute to profitability at higher output levels.

Step-by-step explanation:

Calculation of Total Revenue, Marginal Revenue, Total Cost, and Marginal Cost

The task is to calculate total revenue, marginal revenue, total cost, and marginal cost for each output level for AAA Aquarium Co. which sells aquariums. We'll determine the profit-maximizing quantity by analyzing these calculations.

For each aquarium sold, the price is $20. Fixed costs are $20, regardless of the number of units produced. Variable costs vary with the level of output. Here's how the costs break down:

• 1 unit: $20
• 2 units: $25 ($5 marginal cost for the second unit)
• 3 units: $35 ($10 marginal cost for the third unit)
• 4 units: $50 ($15 marginal cost for the fourth unit)
• 5 units: $80 ($30 marginal cost for the fifth unit)

Based on these figures, we'll construct a table that includes total revenue (price x quantity), marginal revenue (change in total revenue with each additional unit), total cost (fixed cost + total variable cost), and marginal cost (change in total cost with each additional unit).

To determine the profit-maximizing quantity, we look for the quantity level just before marginal cost exceeds marginal revenue. Detailed calculations would reveal that profit is maximized when marginal revenue equals marginal cost, prior to crossing over.

The diagrams for total revenue and total cost curves, as well as marginal revenue and marginal cost curves, vividly illustrate the intersections that determine the profit-maximizing output.

Economies of Scale

In addition to the immediate problem, the concept of economies of scale is also relevant. As Figure 7.9 suggests, larger production quantities can lead to lower average costs, enhancing the potential for increased profit margins.