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shop's profit

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Consider a shop that produces bagels in a monopolistically competitive market. The graph below shows its demand curve (labeled Demand), marginal revenue curve (labeled MR), marginal cost curve (labeled MC), and average cost curve (labeled AC). Assume that the company is operating in the short run.

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Help is given to explain the shop's profit.

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Ken's Bicycle Shop sells mountain bikes. For purposes of a cost-volume-profit analysis, the shop owner has divided sales into two categories, as follows:

Product Category Sales Price Invoice Cost Sales Commissions
High quality $700 $375 20% of sales
Medium quality 500 235 20% of sales

The shop anticipates selling 500 bicycles, 300 of which will be medium quality. Annual fixed costs are $80,000. Ignore taxes.

a. What is the shop's sales mix?
b. What is the shop's break-even sales volume in dollars? (Hint: Find the break-even sales volume
c. How many bicycles of each type must the firm sell to earn a target net income of $50,000?
d. Build your own spreadsheet. Prepare a computer spreadsheet to complete requirements (a)-(c) of this
exercise. What if the market for high quality bikes drops 20 percent and Ken maintains market share?

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