A firm has paid its overhead costs for the year, a fixed cost which does not...

A firm has paid its overhead costs for the year, a fixed cost which does not vary with output in the short run. The price for its product is less than its minimum average variable cost. If it seeks to maximize its profits, in the short run it will: 1. produce some output and incur an economic loss 2. produce no output and incur an economic loss 3. produce some output and earn an economic profit 4. produce no output and earn an economic profit

Solutions

Expert Solution

Answer - 2. produce no output and incur an economic loss

In the given situation, there will be be some fixed cost and the price or AR is less than the Average Variable Cost (AVC). As we know in the short run, the fixed cost remains constant. In this given situation, the price is less than AVC. It implies that the firm is not able to recover all the variable cost with the total revenue generated. The firm now should shut down and incur the loss that is equal to the total fixed cost.

If the firm does not shuts down, then the loss will be some part of the variable cost (not recovered) and the total fixed cost. If the shuts down, then only the total fixed cost will be the loss. Hence, its wise to shut down and suffer a loss that is equal to total fixed cost.

Therefore, in the above situation, the firm should shut down and incur economic loss.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

1. Which of the following costs is typically not a fixed overhead cost for a factory?...

1. Which of the following costs is typically not a fixed overhead cost for a factory? A.Salaries of factory supervisors. B.Rent on the factory building. Property taxes on the factory building. C.Indirect materials used in production. D. None of the answer choices is correct. 2.Which of the following costs does not change in total when the activity level increases or decreases within the relevant range? A.mixed costs B.fixed cost C.variable costs D.relevant costs E.None of the answer choices is correct....

A firm has a fixed cost of $20,000 in its first year of operation. When the...

A firm has a fixed cost of $20,000 in its first year of operation. When the firm produces 1,000 units of output, its total costs are $80,000. When it produces 1,100 units of output, its variable costs are $70,000. If the marginal cost of each of the 100 additional units of output is the same then the marginal cost of producing the 1,050th unit of output is less than $90. True false The average variable cost curve and average total...

Orange, Inc. has identified the following cost drivers for its expected overhead costs for the year:...

Orange, Inc. has identified the following cost drivers for its expected overhead costs for the year: Total overhead budgeted = $200,000 Total direct labor hours budgeted = 2,000 hours Actual direct labor hours worked on Job 21 = 100 Actual direct materials = $5,000 total Actual direct labor = $3,000 total Actual units completed = 100 The totoal cost of Job 21 is: a. $ 22,500 b. $ 16,000 c. $ 18,000 d. $ 19,900 The Total Cost of Job...

1.Amber Angler's fixed operating costs are $2m and its variable cost ratio 70%. The firm has...

1.Amber Angler's fixed operating costs are $2m and its variable cost ratio 70%. The firm has $2.1m in bonds outstanding at an interest rate of 4%. Amber has 0.05m shares of preferred stock which pays a $4 dividend. Crow is in the 40% corporate income tax bracket. Forecasted sales for next year are $9m. What is Amber's degree of financial leverage? Round to two decimal places. b.A firm with a DFL of 1.9 expects EBIT to increase by 3.90%. If...

All of the company's manufacturing overhead costs are fixed—it does not incur any variable manufacturing overhead...

All of the company's manufacturing overhead costs are fixed—it does not incur any variable manufacturing overhead costs. The predetermined overhead rate is based on a cost formula that estimated $2,882,000 of fixed manufacturing overhead for an estimated allocation base of 288,200 direct labor-hours. Wallis does not maintain any beginning or ending work in process inventory.The company’s beginning balance sheet is as follows: Wallis Company Balance Sheet 1/1/XX (dollars in thousands) Assets Cash $ 720 Raw materials inventory 170 Finished goods...

INCENTIVE TO OVERPRODUCE INVENTORY The absorption of fixed overhead costs as part of the cost of...

INCENTIVE TO OVERPRODUCE INVENTORY The absorption of fixed overhead costs as part of the cost of inventory on the balance sheet presents ethical challenges because it provides the opportunity to manipulate reported income. This classic case is based on an actual company’s experience.* Brandolino Company uses an actual-cost system to apply all production costs to units produced. The plant has a maximum production capacity of 40 million units but during year 1 it produced and sold only 10 million units....

INCENTIVE TO OVERPRODUCE INVENTORY The absorption of fixed overhead costs as part of the cost of...

Consider a firm that has fixed costs of 8M. Its sales are 30M and the variable...

Consider a firm that has fixed costs of 8M. Its sales are 30M and the variable costs are 50% of sales. The firm uses both debt and equity and has an interest expense of 1M. There are no taxes. Determine the firm’s operating leverage and financial leverage. Assume that the sales increase by 10%. By how much percentage points will the firm’s EBIT increase? What would be the resulting increase in Net Income?

To be profitable, a firm must recover its costs. These costs include both its fixed and...

To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit. Consider the case of Blue Mouse Manufacturers: Blue Mouse Manufacturers is considering a project that will have fixed costs of $15,000,000. The product will be...

An overhead budget shows the expected cost of all production costs: a.other than fixed overhead items....

An overhead budget shows the expected cost of all production costs: a.other than fixed overhead items. b.other than direct materials and direct labor. c.including selling and administrative expenses. d.including direct materials and direct labor. To create a meaningful performance report, _____. a.actual costs and prior period costs must be compared at the same level of activity b.actual costs and expected costs must be compared at two different levels of activity c.actual costs and expected costs must be compared at the...

Subjects