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Tags
#cfa #cfa-level-1 #economics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit
Question

A business has revenue of $2 million

Total costs of $2.5 million, which are:

Total fixed cost of $1 million

Total variable cost of $1.5 million.

The net loss on the firm’s income statement is reported as $500,000 (ignoring tax implications).

  1. What decision should the firm make regarding operations over the short term?

Answer

In the short run, the firm is able to cover all of its total variable cost but only half of its $1 million in total fixed cost.

If the business ceases to operate, its loss is $1 million, the amount of total fixed cost, whereas the net loss by operating is minimized at $500,000.


Tags
#cfa #cfa-level-1 #economics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit
Question

A business has revenue of $2 million

Total costs of $2.5 million, which are:

Total fixed cost of $1 million

Total variable cost of $1.5 million.

The net loss on the firm’s income statement is reported as $500,000 (ignoring tax implications).

  1. What decision should the firm make regarding operations over the short term?

Answer
?

Tags
#cfa #cfa-level-1 #economics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit
Question

A business has revenue of $2 million

Total costs of $2.5 million, which are:

Total fixed cost of $1 million

Total variable cost of $1.5 million.

The net loss on the firm’s income statement is reported as $500,000 (ignoring tax implications).

  1. What decision should the firm make regarding operations over the short term?

Answer

In the short run, the firm is able to cover all of its total variable cost but only half of its $1 million in total fixed cost.

If the business ceases to operate, its loss is $1 million, the amount of total fixed cost, whereas the net loss by operating is minimized at $500,000.

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Shutdown Analysis
For the most recent financial reporting period, a business domiciled in Ecuador (which recognizes the US dollar as an official currency) has revenue of $2 million and total costs of $2.5 million, which are or can be broken down into total fixed cost of $1 million and total variable cost of $1.5 million. The net loss on the firm’s income statement is reported as $500,000 (ignoring tax implications). In prior periods, the firm had reported profits on its operations. What decision should the firm make regarding operations over the short term? What decision should the firm make regarding operations over the long term? Assume the same business scenario except that revenue is now $1.3 million, wh

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