Musgrave Corporation Has Fixed Operating Costs of $46,000 and Variable

question 62

Multiple Choice

Musgrave Corporation has fixed operating costs of $46,000 and variable costs that are 30% of the current sales price of $2.15.At a price of $2.15,Musgrave sells 40,000 units.Musgrave can increase sales by 10,000 units by cutting its unit price from $2.15 to $1.95,but variable cost per unit won't change.Should it cut its price?

• A) No,EBIT decreases by $6,000.
• B) No,EBIT decreases by $250.
• C) Yes,EBIT increases by $11,500.
• D) Yes,EBIT increases by $8,050.
• E) Yes,EBIT increases by $5,050.

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Definitions:

Average Variable Cost

The variable cost per unit of output, calculated by dividing total variable costs by the quantity of output produced.

Competitive Price-Taker

A market situation where firms or individuals have no ability to influence the market price of goods or services and must accept the prevailing prices set by supply and demand forces.

Marginal Cost

The increase in cost when producing one additional unit of a good or service.

Average Total Cost

The total cost of production (fixed and variable costs combined) divided by the total quantity of output produced.