Question

Breakeven = Fixed costs Contribution margin/unit Contribution Margin = selling price/unit-variable cost per unit Breakeven + target profit = Fixed costs + target profit Contribution margin/unit Tom Piper sells meat pies for $3.00 at the Tennis. The stall costs $250.00 per game to rent. Each pie costs $1.20 and sauce and mustard costs amount to an average of $0.15 per pie.

Required: What is the variable cost of selling each pie?
a) $0.45
b) $0.75
c) $0.90
d) $1.35

Answer 1

The variable cost of selling each pie made by Tom Piper is (d) $1.35. For Doggies Paradise Inc., total revenue, marginal revenue, total cost, and marginal cost for each output level should be calculated following defined steps, and the profit-maximizing output is where marginal revenue equals marginal cost.

Step-by-step explanation:

To calculate the variable cost of selling each meat pie, we simply add the cost of each pie to the sauce and mustard costs per pie. The cost per pie is $1.20, and the sauce and mustard add an additional $0.15 per pie, giving us a total variable cost of $1.35 per pie. Therefore, the correct answer to the question 'What is the variable cost of selling each pie?' is d) $1.35.

Similarly, for a perfectly competitive firm such as Doggies Paradise Inc., the calculation of total revenue, marginal revenue, total cost, and marginal cost for each output level can be done by following these steps:

1. Calculate total revenue by multiplying the number of units sold by the sale price per unit.
   
   
2. Determine marginal revenue by calculating the change in total revenue from selling one additional unit.
   
   
3. Add the fixed costs to the total variable costs to find the total costs at each output level.
   
   
4. Calculate marginal cost by finding the change in total cost when an additional unit is produced.

To find the profit-maximizing quantity, you compare marginal revenue and marginal cost and look for the output level where marginal revenue equals marginal cost (MR = MC).