Question

Assume that Andretti Company has sufficient capacity to produce 120,150 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses?

Answer 1

To find the profit-maximizing quantity for Doggies Paradise Inc., we calculate and graph total revenue, total cost, marginal revenue, and marginal cost, then identify the output level where marginal revenue equals marginal cost.

Step-by-step explanation:

The question addresses the concept of profit maximization in the context of a perfectly competitive firm, Doggies Paradise Inc., in the field of business economics. To determine the profit-maximizing quantity, we need to analyze the total revenue, total cost, and marginal costs associated with different levels of output. To achieve this, we create a table with columns for output level, total revenue, marginal revenue, total cost, and marginal cost, and then plot these relationships on a graph to visually identify the point where marginal cost equals marginal revenue, which indicates the profit-maximizing level of output.

Using the provided information, we can calculate that for each unit sold at $72, the marginal revenue will be $72 as well since the price remains the same for each additional unit sold in perfect competition. Total revenue is simply the price multiplied by the quantity sold. The marginal cost for each unit is the difference in total variable cost for each additional unit produced. The total cost at each level of output is calculated by adding the fixed costs to the total variable costs. Once calculated, we can then sketch the total revenue and total cost curves, as well as the marginal revenue and marginal cost curves, to visually analyze the profit-maximizing quantity.

Answer 2

The company will have financial advantage as it is able to generate more revenue then earlier. The company can benefit from increase of fixed selling expense by selling more units and generating more profits.

Step-by-step explanation:

If Andretti company produces and sells 89,000 daks at $44 per dak then it can generate revenue of $3,916,000.

If the company increases the selling expense it can increase the sales by 35% above the current level of 89,000, the company can sell 120,150 units at $44 per unit which generates the revenue of $5,286,600. There will be additional selling expense of $140,000. The net gain to the Andretti company after the increase of sales will be 5,146,000 ($5,286,600 - $140,000).

There is net gain to to company of $1,230,000 ($5,286,600 - $3,916,000)