Exam 7: Profit Analysis of the Firm

The main difference between profit maximization analysis and breakeven analysis is that profit maximization holds price and average variable cost constant, while breakeven analysis does not.

Incremental profit analysis:

Fill out the following table and find the profit maximization level of output and price.

If a firm produces where marginal revenue is equal to marginal cost and price is less than average variable cost then the firm is maximizing profits.

If a firm produces where marginal revenue is equal to marginal cost and price is less than average variable cost then the firm should not produce at all - even in the short run.

If the marginal revenue from producing one more toaster is $3.50 and the marginal cost of producing that same toaster is $4.25, the firm is maximizing marginal profit.

Jim's Car Rental has fixed costs of $220,000 per month and variable costs per car rented per day of $3. If Jim's charges $25 per day to rent a car, how many car-rental days the number of cars rented times the number of days each is rented) must Jim's have each month to make $33,000 per month before taxes?

Break-even analysis is:

Total profit will be maximized where total revenue is maximized.

For the short run, which of the prices in the following table should be charged by a profit oriented firm?

The unit contribution margin equals the price of a product less the firm's average variable costs.

Given the following total and marginal cost functions, where Q is the output per week, profit maximum will occur at Q = 265.

Fill out the following table and find the arc marginal profit.

AUTHOR'S NOTE - As the acceptance of the offer entails no variable selling and administrative expenses, the total variable costs associated with producing the needed cases is $30.00 per case. This is arrived at by dividing total variable manufacturing expense of $300,000 by the 10,000 case output level. Acceptance of the offer also means that the $1.00 per case in variable selling and administrative expenses $10,000 divided by 10,000 cases) will not have to be paid on the 2000 cases of lost sales. Also, the problem assumes that the 7,000 cases used from inventory will be replaced out of excess future capacity. However, the cost of doing so, because it results form the decision to accept the offer, must be included in the incremental costs associated with its acceptance. Thus, the 10,000 cases referred to in the incremental cost analysis represents the 3,000 cases manufactured utilizing unused capacity and the 7,000 cases of inventory which must be replaced. Incremental revenues which results from decision to accept the order: Yes, accept the offer because incremental revenues exceed incremental costs. -Complete the following cost and revenue data and find the profit-maximizing price and out put.

The goal of the firm is not to have greatest total profits, but rather the firm's goal is to have the greatest profit per unit.

Incremental revenue is additional revenue that a firm will receive by undertaking a particular project.

Find Ruth's Green Thumb's new breakeven output if Ruth's builds a new greenhouse that will raise fixed manufacturing costs to $13,000.00 and lower variable manufacturing cost by $.50 each unit. Assume average variable selling expenses, fixed selling expenses and selling price remain the same.

Jim's Car Rental has fixed costs of $220,000 per month and variable costs per car rented per day of $3. If Jim's charges $25 per day to rent a car, how many car-rental days the number of cars rented times the number of days each is rented) must Jim's have each month to breakeven?

A firm has the following sales data for one month. a. Find the number of cases the firm must sell per month to break even. b. The firm has an unexpected situation in which it can sell 4,000 cases of its product for the next three months 12,000 cases total) for $55 per case. The firm can only supply 7,000 cases from inventory and can only increase production to 11,000 cases total per month. There will be no variable Selling & Administrative Expenses connected with the sale. Should the firm supply the 4,000 cases per month? Why or why not?

Based on the above numbers, what is Ruth's Green Thumb's breakeven quantity?