Question

A company's product sells at $12.40 per unit and has a $5.60 per unit variable cost. The company's total fixed costs are $96,000. What is the contribution margin per unit?

1) $6.80
2) $6.80 per unit
3) $18.00
4) $18.00 per unit

Answer 1

The profit-maximizing quantity for Doggies Paradise Inc. is 3 units, based on marginal revenue equaling marginal cost. Diagrams of total revenue and total cost, and marginal revenue and marginal cost would visually depict the relationships and intersection points.

Step-by-step explanation:

Calculating Profit-Maximizing Quantity

When analyzing the profit-maximizing quantity for Doggies Paradise Inc., it's essential to calculate total revenue, marginal revenue, total cost, and marginal cost at different levels of output. We create a table to do this:

Units SoldTotal RevenueMarginal RevenueTotal CostMarginal Cost1$72$72$164$642$144$72$184$203$216$72$214$304$288$72$284$705$360$72$370$86

To find the profit-maximizing quantity, we look for the quantity at which marginal revenue equals marginal cost. From the table, we can see that the profit-maximizing quantity for Doggies Paradise Inc. is 3 units as the marginal cost for the fourth unit exceeds the marginal revenue.

Diagrammatic representations, which can't be shown here, would indicate the relationships visually. The total revenue curve would show a steady upward trend, given the constant price in a perfectly competitive market. The total cost curve would start at the point representing the fixed cost and then slope upwards, reflecting increasing variable costs. The point at which both curves intersect is the break-even point. Similarly, the marginal revenue would be a horizontal line if the price remains constant, and the marginal cost curve would start below the marginal revenue and eventually intersect it, indicating the profit-maximizing output level.