Question 1

Nate is an operations unit manager for Morningstar Foods. So far in developing his monthly budget, he has identified the following costs: overhead at $120,000; packaging at $70,000; advertising at $60,000; salaries at $400,000; food production at $90,000; and distribution at $22,000. The fixed costs in this situation would be
A)overhead, packaging, advertising, salaries, food production, and distribution.
B)overhead, packaging, advertising, salaries, and distribution.
C)overhead, advertising, distribution, and salaries.
D)overhead, advertising, and salaries.
E)overhead.

Accepted Answer

Fixed costs are those that do not change with the level of production or sales. In this case, overhead, advertising, and salaries are costs that would typically remain constant regardless of the amount of product produced or sold, making them fixed costs.

Question 2

If a firm currently produces 2,500 products per month and decides to produce 2,501, it will incur
A)more fixed costs.
B)higher average fixed costs.
C)fewer variable costs.
D)a marginal cost.
E)higher average variable costs.

Accepted Answer

The additional production of 1 unit would result in the incurrence of a marginal cost, which is the cost of producing one additional unit. The other options are not necessarily applicable in this situation.

Question 3

Suppose managers at Mahindra have determined the costs associated with producing hay balers are equal to the price that they charge for the hay balers. This indicates that Mahindra is producing at the ____ point.
A)breakeven
B)marginal revenue less than marginal cost
C)profit margin
D)competitive price
E)profit maximizing

Accepted Answer

The breakeven point is when the cost of producing a good or service is equal to the revenue generated from selling it. In this scenario, Mahindra is charging a price equal to their production costs, indicating that they are not making a profit but are also not incurring any losses, making it a breakeven point. Therefore, option A is the correct answer.

Question 4

Marginal analysis involves examining
A)what happens to a firm's costs and revenues when production is changed by one unit.
B)what happens to a firm's revenues when one more product is sold.
C)what happens to a firm's costs when one more unit is produced.
D)the difference between marginal revenue and total revenue.
E)the difference between marginal cost and total cost.

Accepted Answer

Marginal analysis involves examining the changes in costs and revenues that occur when production is changed by one unit. Therefore, option A is the correct choice. Options B, C, D, and E are not comprehensive enough and do not cover all aspects of marginal analysis.

Question 5

To determine the breakeven point in units, divide the fixed costs by
A)total costs.
B)variable costs times price.
C)price minus variable costs.
D)price per unit.
E)total revenue minus fixed costs.

Accepted Answer

The breakeven point is the level of sales at which total revenue equals total costs. In other words, it is the point where the company is not making any profit, but is just covering all of its costs. To calculate the breakeven point in units, we need to divide the total fixed costs by the contribution margin per unit, which is equal to price per unit minus variable costs per unit. Therefore, the correct choice is C, which represents the formula for the contribution margin per unit.

Question 6

If Colgate-Palmolive wants to maximize profit on its toothpaste, it should operate at the point where
A)total costs and total revenues are equal.
B)marginal revenue is at its highest level.
C)marginal revenue exceeds marginal cost.
D)marginal revenue equals marginal cost.
E)demand is most elastic.

Accepted Answer

Operating at the point where marginal revenue equals marginal cost is the profit-maximizing point for a firm in a perfectly competitive market. At this point, the firm is producing where the cost of producing an additional unit is equal to the revenue received from selling that unit, resulting in the highest possible profit.

Question 7

Gallants Industries determines that for its air compressors the following results are achieved at a price of $250: total costs = $250,000; variable costs per unit = $100; fixed costs = $175,000. Given these figures, Gallant would break even at ____ units.
A)1,167
B)1,000
C)1,750
D)2,500
E)700

Accepted Answer

Break-even point = Fixed costs / (Selling price per unit - Variable cost per unit)= $175,000 / ($250 - $100)= $175,000 / $150= 1,166.67 unitsTherefore, Gallant would break even at 1,167 units.

Question 8

At what point does a firm maximize profit?
A)The point at which marginal cost equals marginal revenue
B)The point at which the firm sells its product at the highest price
C)The breakeven point plus the adjusted marginal cost
D)The point at which marginal profits equal marginal revenue
E)The point at which marginal cost equals marginal profits

Accepted Answer

A firm maximizes profit at the point where marginal cost equals marginal revenue. This is because at this point, the additional cost of producing one more unit is equal to the additional revenue generated from selling that unit. Any further production beyond this point would result in a decrease in profit, as the added cost of producing each unit would exceed the additional revenue generated from selling that unit. Similarly, producing fewer units would result in lost revenue that could have been earned from selling those units at a price higher than their marginal cost. Thus, the point of maximum profit is where the two curves intersect.

Question 9

If a company increased its price from $100 to $120 and the quantity demanded fell by 40%, the price elasticity of demand for this product is
A)2.
B)1/2.
C)−1/2.
D)−2.
E)4.

Accepted Answer

The formula for price elasticity of demand is:

% Change in Quantity Demanded / % Change in Price

Here, we have:

% Change in Quantity Demanded = (New Quantity Demanded - Old Quantity Demanded) / Old Quantity Demanded = (-40)%

% Change in Price = (New Price - Old Price) / Old Price = (120 - 100) / 100 = 20%

Plugging in the values:

Price Elasticity of Demand = (-40%) / 20% = -2

Since the value is negative, we can ignore the sign and say that the price elasticity of demand is 2 (in absolute terms). Therefore, the best choice is D.

Question 10

Firestone notices that when the number of tires it sells increases from 1,000,000 to 1,000,001, total revenue rises $35. The $35 represents the firm's
A)average revenue.
B)marginal revenue.
C)price elasticity.
D)average variable revenue.
E)average total cost.

Accepted Answer

The $35 increase in total revenue when the firm sells one additional tire indicates the marginal revenue.

Question 11

If the product price is $100, average variable cost $40 per unit, and the total fixed costs are $120,000, what is the breakeven point?
A)500 units
B)2,000 units
C)1,200 units
D)300 units
E)3,000 units

Accepted Answer

The breakeven point in units can be calculated using the formula: Breakeven Point = Total Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). Plugging in the given numbers: $120,000 / ($100 - $40) = $120,000 / $60 = 2,000 units.

Question 12

At the breakeven point,
A)the money a company brings in from selling products equals the amount spent producing the products.
B)the total fixed costs are exactly equal to the total variable costs.
C)profits are exactly equal to the difference between revenue and total variable costs.
D)the marginal revenue of a product is exactly equal to the marginal cost of producing one more unit.
E)the marginal cost curve and the average cost curve will be identical for a particular product.

Accepted Answer

At the breakeven point, the company is not making a profit or a loss. This means that the money it brings in from selling its products equals the amount spent producing the products. Therefore, option A is the correct choice.

Question 13

The Palace Confectionary Co is a small business located in the northeastern United States. The owner of Palace Confectionary is calculating the projected costs for the coming year. There is rent for the building; salaries for the retail employees; raw materials of sugar, chocolate, and other ingredients; wrappers for packaging of individual pieces of candy; boxes; and radio advertising. Palace's ______ are most likely to be the raw materials of sugar, chocolate, and other ingredients, as well as the wrappers.
A)sunk costs
B)variable costs
C)direct costs
D)fixed costs
E)marginal costs

Accepted Answer

The raw materials such as sugar, chocolate, and other ingredients, as well as the wrappers, are most likely to be variable costs, as they vary based on the amount of candy produced. Salaries for retail employees and radio advertising costs could also be variable costs if they vary based on sales volume. Rent for the building and boxes are more likely to be fixed costs, as they do not vary with production levels. Sunk costs are costs that have already been incurred and cannot be recovered; marginal costs refer to the cost of producing one additional unit of a product. Direct costs are costs that are directly traceable to a specific product or service.

Question 14

When marginal cost is equal to marginal revenue, the firm should
A)produce more to increase profits.
B)produce less to decrease total costs.
C)stop producing additional units to maximize profits.
D)provide discounts to encourage purchases.
E)intensify distribution to increase sales.

Accepted Answer

When marginal cost is equal to marginal revenue, it means that the firm is producing the optimal quantity of output where the additional cost of producing one more unit is equal to the additional revenue that unit generates. Thus, any further production would result in a marginal cost higher than marginal revenue, reducing profits. Therefore, the best option for the firm is to stop producing additional units to maximize profits.

Question 15

The Venue Racquet Club found that with annual fixed costs of $60,000, its breakeven point is 2,000 members when the membership charge is $60 per person per year. What is the variable cost per person for Venue?
A)$45
B)$50
C)$30
D)$25
E)$40

Accepted Answer

The breakeven point in units (members in this case) is calculated by dividing the fixed costs by the contribution margin per unit. The contribution margin per unit is the selling price per unit minus the variable cost per unit. Given that the breakeven point is 2,000 members and the fixed costs are $60,000, we can set up the equation $60,000 = 2,000 * ($60 - Variable Cost). Solving for the variable cost gives us $30 as the variable cost per person.

Question 16

The owner of Mega Motor Bikes is opening a new retail location. Which of the following is most likely to be a fixed cost for Mega Motor Bikes?
A)Retail personnel salaries
B)Advertising on Facebook
C)Building rent
D)Electricity
E)Transportation of sold bikes

Accepted Answer

Building rent is a fixed cost because it does not vary with the number of bikes sold or the level of sales. It is a recurring cost that the company has to pay regardless of how many bikes they sell at the new retail location. Salaries and transportation costs are variable costs that depend on the level of sales or the number of bikes sold. Advertising on Facebook is also a variable cost because the company can choose to increase or decrease its advertising spending based on the level of sales or other factors. Electricity is a semi-variable cost because it may include fixed charges such as a connection fee, but the usage costs will vary depending on the level of sales and the amount of electricity consumed by the store.

Question 17

Timothy is developing a business plan for a new type of bicycle helmet. He is interested in finding the point at which the costs of producing the helmet will equal the revenue earned from selling the product. Timothy is interested in finding the
A)elasticity of demand.
B)breakeven point.
C)variable costs.
D)price elasticity.
E)sum of fixed costs.

Accepted Answer

The breakeven point is the point at which the costs of producing a product equal the revenue earned from selling it. This is exactly what Timothy is interested in finding, so the correct answer is B. The other choices are not relevant to Timothy's goal of finding the breakeven point.

Question 18

If Pacific Power and Light increased its rates by 10% and experienced a 2% reduction in the demand for power, the demand would be
A)elastic.
B)minimal.
C)minor elasticity.
D)variable.
E)inelastic.

Accepted Answer

A 2% reduction in demand indicates that customers are still willing to pay almost the same amount despite the price increase. This suggests that the demand for power is inelastic.

Question 19

Dividing the percentage change in quantity demanded by the percentage change in price gives the
A)prestige demand curve.
B)breakeven point.
C)marginal cost curve.
D)price sensitivity curve.
E)price elasticity of demand.

Accepted Answer

Dividing the percentage change in quantity demanded by the percentage change in price gives us the price elasticity of demand. This is a measure of the responsiveness of quantity demanded to changes in price.

Question 20

A certain location of O'Bannon's restaurant has annual fixed costs of $200,000. If an average tab at the restaurant is $60 and the variable costs per tab is $20, how many groups of customers must O'Bannon's serve per year in order to break even?
A)2,000
B)5,000
C)10,000
D)3,333
E)2,500

Accepted Answer

The answer of A certain location of O'Bannon's restaurant has...

Quiz 12: Pricing Concepts and Management

If a firm currently produces 2,500 products per month and decides to produce 2,501, it will incur

Suppose managers at Mahindra have determined the costs associated with producing hay balers are equal to the price that they charge for the hay balers. This indicates that Mahindra is producing at the ____ point.

Marginal analysis involves examining

To determine the breakeven point in units, divide the fixed costs by

If Colgate-Palmolive wants to maximize profit on its toothpaste, it should operate at the point where

Gallants Industries determines that for its air compressors the following results are achieved at a price of $250: total costs = $250,000; variable costs per unit = $100; fixed costs = $175,000. Given these figures, Gallant would break even at ____ units.

At what point does a firm maximize profit?

If a company increased its price from $100 to $120 and the quantity demanded fell by 40%, the price elasticity of demand for this product is

Firestone notices that when the number of tires it sells increases from 1,000,000 to 1,000,001, total revenue rises $35. The $35 represents the firm's

If the product price is $100, average variable cost $40 per unit, and the total fixed costs are $120,000, what is the breakeven point?

At the breakeven point,

When marginal cost is equal to marginal revenue, the firm should

The Venue Racquet Club found that with annual fixed costs of $60,000, its breakeven point is 2,000 members when the membership charge is $60 per person per year. What is the variable cost per person for Venue?

The owner of Mega Motor Bikes is opening a new retail location. Which of the following is most likely to be a fixed cost for Mega Motor Bikes?

Timothy is developing a business plan for a new type of bicycle helmet. He is interested in finding the point at which the costs of producing the helmet will equal the revenue earned from selling the product. Timothy is interested in finding the

If Pacific Power and Light increased its rates by 10% and experienced a 2% reduction in the demand for power, the demand would be

Dividing the percentage change in quantity demanded by the percentage change in price gives the

A certain location of O'Bannon's restaurant has annual fixed costs of $200,000. If an average tab at the restaurant is $60 and the variable costs per tab is $20, how many groups of customers must O'Bannon's serve per year in order to break even?