Question

Per unit 50,000 100,000 110,000 Sales $1,250,000 $2,500,000 $2,750,000 Cost of goods sold Direct material $9 450,000 Direct labor $10 500,000 Variable manufacturing overhead $2.50 125,000 Fixed manufacturing overhead 32,000 Cost of goods sold 1,107,000 Gross profit 143,000 Variable sales and admin expenses $1.00 50,000 Fixed sales and expenses 105,000 Income before taxes 12,000) Taxes -1,800 Net income ($10,200)

Answer 1

The profit-maximizing quantity for Doggies Paradise Inc., selling winter coats for dogs, is 3 units, as this is the output level where marginal revenue equals marginal cost at $72 and $30 respectively.

To determine the profit-maximizing quantity, we need to calculate total revenue, marginal revenue, total cost, and marginal cost for each output level from one to five units for Doggies Paradise Inc. selling winter coats for dogs at $72 each.

Total Revenue (TR) is the total money received from sales, calculated by multiplying the number of units sold by the price per unit. Marginal Revenue (MR) is the additional revenue gained from selling one more unit, and since this is a perfectly competitive market, MR equals the price of the good, which is $72.

Total Cost (TC) is the sum of fixed and variable costs for each output level. Marginal Cost (MC) is the additional cost of producing one more unit, calculated by taking the change in total cost when output increases by one unit.

For one unit: TR=$72, TC=$164 ($100 fixed + $64 variable), MC=Not applicable

For two units: TR=$144, TC=$184 ($100 fixed + $84 variable), MC=$20

For three units: TR=$216, TC=$214 ($100 fixed + $114 variable), MC=$30

For four units: TR=$288, TC=$284 ($100 fixed + $184 variable), MC=$70

For five units: TR=$360, TC=$370 ($100 fixed + $270 variable), MC=$86

The profit-maximizing quantity is reached when MR = MC. By reviewing the marginal cost for each output level, we can see that the profit-maximizing quantity is 3 units because MR ($72) equals MC ($30) at this output level, and MC exceeds MR beyond this point.

The probable question may be:

"Per unit 50,000 100,000 110,000 Sales $1,250,000 $2,500,000 $2,750,000 Cost of goods sold Direct material $9 450,000 Direct labor $10 500,000 Variable manufacturing overhead $2.50 125,000 Fixed manufacturing overhead 32,000 Cost of goods sold 1,107,000 Gross profit 143,000 Variable sales and admin expenses $1.00 50,000 Fixed sales and expenses 105,000 Income before taxes 12,000) Taxes -1,800 Net income ($10,200). What is the profit-maximizing quantity"