Question

Given a full cost of $7,000 and an incremental cost of $5,000, a bid price of $6,000 will contribution toward profit ______ excess capacity.

a. only if a firm has
b. only if a firm does not have
c. regardless of whether a firm has
d. depending on whether a firm has

Answer 1

Accepting a bid of $6,000 contributes $1,000 towards profit if a firm has excess capacity, as it covers the incremental cost of $5,000, and the additional revenue helps cover fixed costs.

Step-by-step explanation:

A bid price of $6,000, when the full cost is $7,000 and the incremental cost is $5,000, results in a situation where the bid price is higher than the incremental cost but lower than the full cost. If the firm has excess capacity, accepting a bid at $6,000 would contribute $1,000 toward profit because the incremental cost of producing the good or service is covered, and the additional $1,000 helps to cover some of the fixed costs that would otherwise be incurred regardless of production.

However, without excess capacity, the firm would need to consider opportunity costs and the potential for higher-value uses of its resources, which may lead to a different decision on whether accepting the bid contributes positively to profit.