Asked by Nadeen ALHawamdeh on Sep 24, 2024
Verified
A firm's fixed but avoidable costs are $100,000 and its variable costs are $250 per unit.It produces 50,000 units and prices it at $400 per unit.In the long-run,how low can price go before the firm decides to shut down?
A) $150
B) $252
C) $250.20
D) $400
Fixed Costs
Costs that do not vary with the level of production or business activity, such as rent, salaries, and insurance.
Variable Costs
Costs that change in proportion to the level of production or business activity.
Shut Down
The process of ceasing operations, often temporarily, as a strategic or economic decision by a business.
- Recognize the situations that warrant a shutdown of a firm in the immediate and extended future.
- Understand and describe the relevance of average variable costs, overall average costs, and price in the context of making shutdown decisions.
- Understand the implications of marginal costs and fixed costs on production decisions.
Verified Answer
JB
Jared Burroughs3 days ago
Final Answer :
B
Explanation :
To determine the shutdown price, we need to find the price where the firm's total revenue is just enough to cover its total variable and fixed costs.
Total variable cost = $250/unit x 50,000 units = $12,500,000
Total cost = $100,000 + $12,500,000 = $12,600,000
Break-even price = Total cost / Number of units sold = $12,600,000 / 50,000 = $252.
Therefore, the firm will shut down if the price goes below $252. Choice B is the only option that is below the break-even price.
Total variable cost = $250/unit x 50,000 units = $12,500,000
Total cost = $100,000 + $12,500,000 = $12,600,000
Break-even price = Total cost / Number of units sold = $12,600,000 / 50,000 = $252.
Therefore, the firm will shut down if the price goes below $252. Choice B is the only option that is below the break-even price.
Learning Objectives
- Recognize the situations that warrant a shutdown of a firm in the immediate and extended future.
- Understand and describe the relevance of average variable costs, overall average costs, and price in the context of making shutdown decisions.
- Understand the implications of marginal costs and fixed costs on production decisions.