Question

Assume that an airplane was bought last year for $1 million and that the plane can be flown for only ten years during which it will have no resale value and after which it will have no scrap value and your annual operating costs will be $300,000 every year. You discover this year that your annual operating revenues will be $360,000 (exclusive of the purchase price of the plane) for all remaining years of the plane's life. Again, the plane cannot now be sold. You should Select one: O a. immediately halt operations of the plane because you are losing $60,000 a year. O b. immediately halt operations of the plane because you are losing $160,000 a year c. immediately halt operations of the plane because you are losing $40,000 a year. d. continue operating the plane so long as your operating costs are lower than your operating revenues and you can't resell the plane for more than the difference in the plane's remaining life.

Answer 1

option d is the correct answer

operating revenue is more than the operating cost (AVC)

so if an airline chooses to operate it is able to recover AVC, therefore is should continue to operate