Question

Something Stores, Inc. is concerned about its profitability for the current year, since its profit margin has dropped 10?

1) Comparison with the industry average for the current year
2) Comparison with its current ratio for the current year
3) Comparison with the profit margins for its major competitors for the current year
4) Comparison with its profit margins for the past 5 years

Answer 1

The firm's accounting profit is calculated by subtracting total costs from total revenue. In the example, the firm's accounting profit is $50,000. Understanding this figure is crucial for making informed decisions and assessing the firm's health in comparison to the market.

Step-by-step explanation:

The subject of the student's question pertains to business profitability. When a firm wishes to understand its profit margin, it needs to calculate profits by comparing total revenue and total cost. This is illustrated in the self-check question provided, where a firm had sales revenue of $1 million and incurred costs for labor, capital, and materials totaling $950,000. The firm's accounting profit can be calculated by subtracting the total costs from the sales revenue.

Accounting profit = Sales Revenue - Total Costs

Accounting profit = $1,000,000 - ($600,000 + $150,000 + $200,000)

Accounting profit = $1,000,000 - $950,000

Accounting profit = $50,000

The firm's accounting profit last year was $50,000. This calculation is important as it assists firms in making decisions about their operations. Looking at the average cost curve helps determine profitability at different levels of output and indicates whether the firm can earn profits given the current price in the market. The difference between the price and average cost can signify the profit margin. The shutdown point is the point at which the firm should cease production in the short run to avoid losses.