Kellogg's and General Mills Are Two of the Dominant Breakfast

question 72

Multiple Choice

Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. If both companies sign an athlete, they will each make $5 million in economic profit. If only firm signs, they earn $8 million in economic profit and the other firm incurs an economic loss of $1 million. If neither firm signs, they break even. What are the strategies in this game?

• A) Do not sign exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box and make $8 million in profit.
• B) Sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box and do not sign exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box.
• C) Sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box and make $8 million in profit.
• D) Make $5 million or $8 million in profit.

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Definitions:

Contribution Margin

The amount by which sales revenue exceeds variable costs of a product, indicating how much contributes to covering fixed costs and generating profit.

Fixed Budget

A budget that is established at the beginning of a period and does not change, regardless of actual performance or outcomes.

Direct Labor Rate

The cost per hour for direct labor, which includes wages of workers who are directly involved in the production of goods.

Efficiency Variances

Represents the difference between the actual input costs and the standard input costs anticipated for the production achieved.