Scenario 8.1: Two Soft-Drink Firms, Fizzle & Sizzle, Operate on a River

question 36

Multiple Choice

Scenario 8.1:
Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by $500,000 yearly.
-Refer to the information in Scenario 8.1. If Fizzle and Sizzle sell the same output at the same price and are otherwise identical, Fizzle's profit will be:

• A) higher than Sizzle's by $500,000 yearly.
• B) higher than Sizzle's by just less than $500,000 yearly.
• C) zero in the long run, and Sizzle will be out of business.
• D) the same as Sizzle's because Fizzle must be assigned an implicit cost of $500,000 yearly for economic rent.
• E) the same as Sizzle's because Sizzle will move to a more advantageous location in order to compete.

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Definitions:

Standard

A benchmark or a set level of performance or achievement that is established for a process or product.

Variable Overhead Efficiency Variance

The difference between the actual variable overhead incurred and the standard cost of variable overhead allocated, based on the efficiency of operations.

Supplies Cost

Supplies cost refers to the expense incurred in purchasing office or production supplies that are necessary for day-to-day operations.

Variable Manufacturing Overhead

Costs in the manufacturing process that fluctuate with production volume, such as utilities and raw materials, which do not remain constant as production levels change.