A firm produces three products A, B, and C. Long-run projected sales per year ar
ID: 1204988 • Letter: A
Question
A firm produces three products A, B, and C. Long-run projected sales per year are 10,000 units of A, 12,000 units of B, and 8,000 of C.
a) Determine whether the firm should remain in business under the following conditions: Good A sells at $5.00 per unit, and AVC is $3.50. Good B sells at $7.50 per unit, and AVC is $5.00. Good C sells at $10.00 per unit, and AVC is $7.50. Total fixed cost is $60,000 per year.
b) If the firm allocates fixed cost using standard accounting pracitces (allocation of fixed cost to each good is based on the good's proportion of total sales), what is the total accounting profit for each good?
Explanation / Answer
sales
avc
price
FC
rev
cost
profit
net profit
A
10000
3.5
5
20000
50000
35000
15000
-5000
B
12000
5
7.5
24000
90000
60000
30000
6000
C
8000
7.5
10
16000
80000
60000
20000
4000
30000
60000
220000
155000
65000
5000
We have constructed the Revenue and Cost structure of the company product –wise and in total.
From the above table we can find the answer to each of the questions raised.
Question :
Determine whether the firm should remain in business under the following conditions: Good A sells at $5.00 per unit, and AVC is $3.50. Good B sells at $7.50 per unit, and AVC is $5.00. Good C sells at $10.00 per unit, and AVC is $7.50. Total fixed cost is $60,000 per year.
Question: If the firm allocates fixed cost using standard accounting practices (allocation of fixed cost to each good is based on the good's proportion of total sales), what is the total accounting profit for each good?
Ans: Using standard allocation of Fixed costs based on the criterion of units produced, we have seen that Product A will lose $ (-5000), Product B wii get a net profit of $ ( 6000) and Product C will get a ( net profit of $ 4000) : the firm will make a total net profit of $5000/- if it continues to produce all three products.
sales
avc
price
FC
rev
cost
profit
net profit
A
10000
3.5
5
20000
50000
35000
15000
-5000
B
12000
5
7.5
24000
90000
60000
30000
6000
C
8000
7.5
10
16000
80000
60000
20000
4000
30000
60000
220000
155000
65000
5000
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