Question

Duck Manufacturing sells rubber rain boots for $50 per pair. In 2014, the firm had fixed costs of $312,000 and variable costs of $24 per pair, and it expects these figures to remain the same in 2015. In 2014, Duck's total sales were $900,000, and the company expects this amount to increase to $925,000 in 2015. If this sales increase does indeed occur, Duck's margin of safety ratio will increase by about ________ percent.

A) 1.25%
B) 2.78%
C) 3.33%
D) 5.00%

Answer 1

The question involves calculating the margin of safety ratio and determining how an increase in sales affects this ratio for a company, using given sales and cost figures.

Step-by-step explanation:

The question asks about the concept of margin of safety ratio and how an increase in sales would affect this ratio for Duck Manufacturing. The margin of safety represents the amount by which sales can drop before a business reaches its breakeven point.

The formula for the margin of safety ratio is (Current Sales - Breakeven Sales) / Current Sales. Since fixed and variable costs remain the same in 2015 as in 2014, we can calculate the margin of safety ratio for 2014 and 2015 using the provided sales figures and then find the percentage increase.

To determine the profit maximizing quantity, calculate total revenue and marginal revenue for each output level, then calculate total cost and marginal cost.

Graph the total revenue and total cost curves, as well as the marginal revenue and marginal cost curves. The profit maximizing quantity occurs where MR equals MC. For Doggies Paradise Inc., the profit maximizing quantity is 2 units.