Final answer:
A contribution-format income statement for the bullarama event will vary based on competition levels, affecting total revenue. Profits can be calculated by comparing this revenue to total costs, and understanding the shutdown point is crucial for short-run decision making.
Step-by-step explanation:
To understand how to create a contribution-format income statement for the bullarama event under different competitive scenarios, we will consider three projections: optimistic (no onsite competitors), conservative (one onsite competitor), and pessimistic (two onsite competitors). The process involves calculating profits by comparing total revenue and total costs, as well as analyzing various points such as the shutdown point and the price at which a firm should continue producing in the short run.
Optimistic Projection
Under an optimistic projection with no onsite competitors, total revenue is expected to be highest due to the absence of competition. To calculate profits, subtract the total fixed and variable costs from this revenue. Profits will be maximized as long as marginal revenue exceeds marginal cost.
Conservative Projection
With one onsite competitor, total revenue will likely decrease due to market sharing. Profits are identified by the difference between total revenue and total costs. If the average cost is below the price, the company will still realize a profit.
Pessimistic Projection
When there are two onsite competitors, the total revenue will be split among more participants, possibly leading to a decrease in per-firm revenue. Here, the firm needs to consider the shutdown point; if the revenue cannot cover the average variable costs, the company should cease operations in the short run to minimize losses.
The firm should determine the price at which it should continue producing by ensuring that it at least covers the average variable costs to avoid hitting the shutdown point and to minimize losses in the short run.