Question

If at optimum output of 1,000 units, the firm is incurring average variable cost per unit of $3, average fixed cost per unit of $1.50, and selling its output at $7 per unit, total profit is Group of answer choices a) $1,500. b) $2,500. c) $250. d)$7,000.

Answer 1

Correct answer is B, $2,500

Step-by-step explanation:

To get profit, First, deduct variable cost from sales for the period to get the contribution margin. Finally, Deduct fixed cost from contibution margin to get the profit for the period.

Computation would be:

Sales (1,000 x 7) $7,000

Less: Variable cost (1,000 x 3) $3,000

Contribution margin $4,000

Less: Fixed cost (1,000 x 1.5) $1,500

Profit $2,500

*It can also be done by deducting variable cost from the selling price to get the unit contribution margin then deduct the fixed cost from the unit contribution margin and from it multiply the output sold to get the profit.