Answer (B) is correct. Jeffrey’s contribution margin ratio reveals that 4 % of the sales price of each product is contribution margin ($30 × 45% = $13.50). Thus, the excess of May income over April is $13,500 (1,000 × $13.50). Fixed costs do not vary between April and May.
Answer (C) is correct. Since fixed costs remain unchanged, a change in contribution margin results in an identical change in operating profit within the relevant range.
Answer (A) is correct. Wilkinson’s contribution margin ratio reveals that 4 % of the sales price of each product is contribution margin ($30 × 45% = $13.50). Thus, sales of 3,000 units will produce total revenues of $40,500 (3,000 × $13.50). Since fixed costs are $10,000, income for the month is $30,500 ($40,500 – $10,000).
Answer (D) is correct. Relevant revenues and costs are those that (1) occur in the future and (2) vary between alternatives. The analysis of these differences is the basis of relevant-cost analysis.
Answer (C) is correct. Economic profits are not earned until the organization’s income exceeds not only costs as recorded in the accounting records, but the firm’s implicit costs as well. Economic profit is equal to the accounting (book) profit less the implicit costs. Therefore, economic profit reduces accounting profits by associated cost of capital.
Answer (D) is correct. A firm should increase production until marginal revenue equals marginal cost. In the short run, this is the same as saying a firm in perfect competition will increase production until marginal cost equals price. The result is the short-run maximization of profits. As long as selling price exceeds marginal cost, a firm should continue producing. In the short run in perfect competition, the market price equals marginal revenue because no firm can affect price by its production decisions.
Answer (A) is correct. A monopoly consists of a single firm with a unique product. Such a firm has significant price control. For profit maximization, it increases production until its marginal revenue equals its marginal cost (unless marginal revenue is less than average variable cost, which will cause the firm to shut down). When a monopoly exists, consumers will face higher prices and lower output than in perfect competition.
Answer (A) is correct. Monopolistic competition is characterized by a large number of firms offering differentiated products. Entry into the market is relatively easy, firms have some price control, and substantial nonprice competition exists, such as advertising.
Answer (D) is correct. The oligopoly model is much less specific than the other market structures, but there are typically few firms in the industry. Thus, the decisions of rival firms do not go unnoticed. Products can be either differentiated or standardized. Prices tend to be rigid (sticky) because of the interdependence among firms. Entry is difficult because of either natural or created barriers. Price leadership is typical in oligopolistic industries. Under price leadership, price changes are announced first by a major firm. Once the industry leader has spoken, other firms in the industry match the price charged by the leader. The mutual interdependence of the firms influences both pricing and output decisions.
Answer (C) is correct. An oligopolistic industry is characterized by only a few firms. Usually there are significant barriers to entry, such as high capital requirements, which prevent new firms from entering the industry. The automobile industry is an example.
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