Final answer:
Calculating profits for a company involves subtracting total costs from total revenues. Looking at the average cost helps indicate whether the company makes a profit or loss, and comparing marginal cost with marginal revenue determines if the marginal unit adds to profits.
Step-by-step explanation:
Understanding Profit Calculation for a Business
When considering the performance of a business such as the WipeOut Ski Company, we must look at the company's ability to generate profits. To calculate profits or losses, we can subtract the total costs from the total revenues the company obtains by selling its products. For example, if the WipeOut Ski Company produces 5 units and sells them for $25 each, the total revenue is $125. If the costs to produce these units are less than $125, the company is making a profit.
To determine at a glance whether the company is making or losing money, we analyze the average cost of producing one unit. If the average cost per unit is below $25, the company profits from each unit sold. Conversely, if the average cost exceeds the selling price, the company incurs a loss.
Additionally, to assess whether the marginal unit produced is adding to profits, we must look at the additional cost of producing one more unit (marginal cost) versus the additional revenue obtained from selling that unit (marginal revenue). If the marginal revenue is higher than the marginal cost, then the marginal unit is indeed contributing to the company's profits.