Relationship Between Marginal Cost and Marginal Revenue

The budget analysis shows that the labor hours of the firm are higher than the budgeted amount. As such, the firm needs to evaluate the cost benefit analysis of making or buying their products. To make this decision, various factors need to be considered. Before making the decision, Peyton needs to evaluate the marginal costs and revenue of making versus buying the products. The firm should take the option which provides the highest marginal profit which is the

15. In pure competition, each extra unit of output that a firm sells will yield a marginal revenue that is ( )

• Cost would increase to $600/wafer, which would cut our gross profit by 35%. The cost calculations are given in Exhibit 1.

Such firms identify this optimized level of output by determining the specific point at which marginal revenue and marginal cost are equal. The value to the firm is that this knowledge tells them when they have maximized their profit making potential. Going past this point will result in a negative return.

As you can see by the chart if the company were to produce an additional unit after 8 it would mean the marginal cost would be more than the marginal revenue causing the company to be losing money. Looking at it from total revenue to total cost point of the view; the profit from 8 widgets is $540 but if you produce one more is drops to $520, so again this shows where the company has hit their profit maximization mark.

In a profit maximizing firm when the marginal revenue is greater than marginal cost the firm should increase production. If there is extra production that increases revenue and doesn’t add to cost, then of course profits will increase. When there is increase revenue profits will go up, and with no additional cost to the increase. This is something that is very ideal to a business. When this happens it’s almost to perfect. Increase in profit with no cost to

D. employ the combination of resources that will produce the profit-maximizing output at the minimum cost

In our analysis we determined the equations for total cost and marginal cost using the average cost obtained from the regression model provided, and the fixed costs estimates in the collected data calculated by a previous resource endorsed by the company. Once we have determined the marginal cost equation, we calculated the output for perfect competition profit maximizing criteria P

The Marginal Cost graph intersects the Average Total Cost graph and the Average Variable Cost graphs at their minimum points. As long as the cost of producing one additional unit remains less than average total cost, the average total cost continues to fall. When marginal cost finally exceeds average total cost, average total cost begins to rise in response. The same effect applies to the relationship between marginal cost and average variable cost.

|M |2/07 | |Read Ch. 3, Analysis of Cost, Volume, and Pricing to Increase Profitability, pp. 106-125. (Skip the material on Multiple-Product |

In comparison, the marginal cost is the added cost of producing one more unit of output. It is determined by the change in total cost (TC) divided by the change in output (Q). MC= TC/Q. In the provided scenario, for Company A to produce one widget TC=$30, to produce two widgets TC=$50 thus the marginal cost was $20; furthermore the cost per widget to produce was $25. Marginal cost will continue to decrease for Company A until they reach their profit maximization of $42.86 per widget at 7 widgets. Marginal cost will then begin to decrease for every additional widget produced until the end result of 15 widgets with a MC that exceeds $80, also allowing TC to topple to TR ($1220/15=$81.33).

In a competitive industry, suppose the marginal revenue product (MRP) of the last doughnut baker hired is $35, the MRP of the last bagel baker hired is $15, and a bakery must pay doughnut bakers $40 a day and bagel bakers $10 per day. To maximize profits the bakery should hire:

The second and final option is to analyze marginal revenue and marginal cost. This process is done by comparing the amount each additional unit of output is costing and adding it to the total revenue and total cost. Unfortunately, this information was not made available for this

A way to determine the quantity of profit maximization is to conclude where marginal revenue equals marginal costs. Rather than computing the profit for all levels of sales; total revenue and total variable costs are considered. Marginal revenues and marginal costs are considered in a similar way like marginal profit, thus defining the amount of change for all sales’ levels (Huter, 2012, p.2).

Operating profit margin figures in the table above show the return from net sales[13]. However profit margin ratios are high enough for the 3 years, there is a fall from 12.86% to 11.26% during 2011-12. Sales revenue increases with a higher rate than gross profit so there is a poor