A Firm Produces and Sells Two Products, Mica and Plax

question 25

Multiple Choice

A firm produces and sells two products, Mica and Plax. The following information is available relating to setup costs (a part of factory overhead) : With traditional two-stage allocation of overhead costs, using direct labor hours as the allocation base, the setup cost portion of overhead that is allocated to each unit of product for Mica and Plax, respectively is:

• A) $80; $.80.
• B) $3.20; $3.20.
• C) $4.00; $4.00.
• D) $160.00; $12,800.00.
• E) $200.00; $16,000.00.

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Definitions:

Profit

The financial gain realized when the revenue gained from a business activity exceeds the costs, expenses, and taxes needed to sustain the activity.

Normal Profit

The minimum level of profit necessary for a firm to remain competitive in the market, essentially covering opportunity costs.

Equilibrium Price

The price at which the quantity of goods supplied equals the quantity of goods demanded in a market.

Purely Competitive Industry

A purely competitive industry is characterized by many buyers and sellers, homogenous products, and free entry and exit from the market, ensuring no single entity can control the market price.