Final answer:
AAA Aquarium Co. can determine the profit-maximizing level of output by calculating and comparing total revenue, total cost, marginal revenue, and marginal cost for different production levels. Diagrams showing the relationship between these concepts help visualize the profit-maximizing output level. The decision to continue or cease operations depends on whether the revenue covers variable costs.
Step-by-step explanation:
Problem Analysis and Solution
To calculate total revenue, marginal revenue, total cost, and marginal cost for each output level for AAA Aquarium Co., you first identify the revenue and costs associated with each level of output. Next, you apply the formulas for total revenue, which is the selling price times the quantity sold; total cost, which is the sum of fixed and variable costs; marginal revenue, which is the change in total revenue with each additional unit sold; and marginal cost, which is the change in total costs with each additional unit produced.
The profit-maximizing quantity of output is the level at which marginal cost is equal to marginal revenue. If marginal cost is greater than marginal revenue, the company should produce less, and if marginal cost is less than marginal revenue, the company should produce more.
To illustrate these concepts, two diagrams are needed: one showing the total revenue and total cost curves and another showing the marginal revenue and marginal cost curves. By comparing these curves, the company can determine the profit-maximizing output level.
If the center is earning revenues of $20,000 and incurring variable costs of $15,000, it covers its variable costs and contributes $5,000 towards fixed costs. Therefore, it should continue in business. Contrastly, if it's earning $10,000 while variable costs are $15,000, it is not covering its variable costs and should shut down immediately.