Final answer:
This college-level business exercise involves allocating product costs to calculate the cost of goods sold and the ending inventory, impacting gross profit and net income.
Step-by-step explanation:
The exercise touches on a critical aspect of business accounting, which involves allocating product cost between the cost of goods sold (COGS) and the ending inventory. This process is vital as it directly affects a company's gross profit and net income. In the given scenario, the firm's total revenues from selling five units at $25 per unit are $125. However, the total costs incurred for producing these units are $130, resulting in a loss of $5. This indicates that the firm is not selling its products at a profitable margin. The concept has applications in determining the correct profit-maximizing output level and calculating profits at that level, as indicated by the profit figure of $40 at the optimal output quantity in a subsequent step of the exercise.