Question

During March, a firm expects to its total sales to be $155,000, its total variable costs to be $94,500, and its total fixed costs to be $24,500. The contribution margin for March is:

a. $60,500.
b. $94,500.
c. $119,000.
d. $36,000.
e. $24,500.

Answer 1

The profit-maximizing output for Doggies Paradise Inc. is 3 units, where marginal revenue equals marginal cost before MC exceeds MR, ensuring the maximization of profits.

Step-by-step explanation:

To find the profit-maximizing quantity for Doggies Paradise Inc., we need to analyze the relationship between total revenue (TR), total cost (TC), marginal revenue (MR), and marginal cost (MC). The company sells each winter coat for dogs at $72, which becomes the marginal revenue per unit in a perfectly competitive market where MR equals the price. Fixed costs are $100 regardless of the output level. Below is a calculation of the total revenue, total cost, and marginal cost:

• 1 unit: TR = $72, VC = $64, TC = $164, MC = $64
• 2 units: TR = $144, VC = $84, TC = $184, MC = $20 ($84-$64)
• 3 units: TR = $216, VC = $114, TC = $214, MC = $30 ($114-$84)
• 4 units: TR = $288, VC = $184, TC = $284, MC = $70 ($184-$114)
• 5 units: TR = $360, VC = $270, TC = $370, MC = $86 ($270-$184)

By constructing both TR and TC curves, as well as MR and MC curves, we can determine that the profit-maximizing output is the quantity where MR equals MC before MC exceeds MR, which in this case is at 3 units. Beyond this level, the cost of producing an additional unit exceeds the revenue it brings, hence reducing profit.

The profit-maximizing quantity for Doggies Paradise Inc. is 3 units, as at this output level MR and MC are equal and MC does not exceed MR, which maximizes profit.