Final answer:
An increase in the ratio of gross profit to sales could indicate fictitious sales. The firm's accounting profit, calculated by subtracting explicit costs from revenue, would be $50,000. Privately owned firms target accounting profit, which excludes implicit costs.
Step-by-step explanation:
An unexplained increase in the ratio of gross profit to sales may suggest the possibility of fictitious sales. This is because when sales are recorded without actual merchandise being sold, the reported revenues increase without a corresponding increase in the cost of goods sold, inflating the gross profit margin. Another scenario that could lead to a similar increase might be unrecorded or underestimated cost of goods sold, though this is not one of the options provided.
To answer the self-check question: A firm had sales revenue of $1 million last year. It spent $600,000 on labor, $150,000 on capital, and $200,000 on materials. To calculate the firm's accounting profit, we subtract the explicit costs (labor, capital, materials) from the total revenues. The accounting profit would be $1,000,000 - ($600,000 + $150,000 + $200,000) = $1,000,000 - $950,000 = $50,000.
Privately owned firms are motivated to earn profits, which is the difference between revenues and costs. Accounting profit only considers explicit costs, which are the out-of-pocket costs for a firm, such as payments for wages and salaries, rent, or materials.