Final answer:
To calculate the effect on profits of a planned increase in sales, you need to know the increase in units sold, any change in fixed costs, and the variable cost per unit. Profits are calculated by subtracting total costs from total revenue, which are affected by the amount of units sold and fixed and variable costs.
Step-by-step explanation:
To calculate the effect on profits of a planned increase in sales, you need the increase in units sold, any change in fixed costs, and the variable cost per unit. The calculation you're referring to involves understanding how these elements interact within the profit equation. Profits are determined by taking the total revenue, which is the product of the price charged and the quantity sold, and subtracting the total costs, which is the sum of fixed and variable costs.
A perfectly competitive firm can sell as many units as it wants at the market price, increasing its total revenue with every unit sold. If the fixed costs remain unchanged, any increase in units sold will contribute to higher profits as long as the revenue per additional unit exceeds the variable cost associated with producing that unit. It's essential to understand that if the variable or fixed costs increase, this would require an adjustment either in sales volume or pricing to maintain or increase profits.
Considering a firm that has no changes in fixed costs, determining the profitability of an increase in units sold becomes straightforward. Simply calculate the additional revenue from the extra units by multiplying them by the sale price and subtract the additional variable costs. If the leftover amount after subtracting the extra variable costs from the extra revenue is positive, the firm will see an increase in profit.