Question

A small firm has monthly revenue of $20,000, variable costs of $21,000, and fixed costs of $2,000. The firm's profit is and it shut down. O -$1,000; should O-$3,000; should not O-$1,000; should not -$3,000; should

Answer 1

Correct answer is option D. The profit of the firm is -$3000 and it should shut down.

Explanation:

The total revenue of the firm = $20,000

Variable cost of the firm = $21,000

Fixed cost of the firm =$2000

Total cost of the firm = Variable Cost+ Fixed Cost

=$21000+$2000

=$23000

Therefore, Profit of the firm =Total Revenue -Total

Cost

= $20000-$23000

=-$3000

Here, the total cost are more than the total revenue. Therefore, the firm has incurred a loss of $3000.

A firm is advised to carry out it's business operations when it is able to cover atleast variable costs because variable costs are the costs that changes as per the change in output like material, labour etc., so a firm can carry on while covering variable costs by reducing the production to smaller proportions to cope up with losses.

But, when a firm is not even able to cover the variable cost, it is better to shut down because such a firm cannot cope up with the losses by even producing in smaller quantities.

Here, the firm has earned revenue of $20,000 and the variable costs of the firm are $21,000 which are $1000 more than the revenue. So, the revenues are not sufficient enough to cover the variable costs, so the firm should shut down.

Option A and C has provided wrong figure of profit, so they are incorrect. Option B has correct figure of profit but has given wrong suggestion to not to shut down the firm. Therefore, option A,B and C are incorrect and option D is correct and justified with above explanation.