Please explain the math behind your answer. The accountants hired by the Brooksi
ID: 1126876 • Letter: P
Question
Please explain the math behind your answer.
The accountants hired by the Brookside Racquet Club have determined total fixed c ost to be $75,000, total variable cost to be $130,000, and total revenue to be $125,000. Because of this information, in the short run, the Brookside Racquet Club should
a.
shut down because staying open would be more expensive.
b.
lower their prices to i ncrease their profits.
c.
stay open because shutting down would be more expensive.
d.
stay open because the firm is making an economic profit.
a.
shut down because staying open would be more expensive.
b.
lower their prices to i ncrease their profits.
c.
stay open because shutting down would be more expensive.
d.
stay open because the firm is making an economic profit.
Explanation / Answer
Ans:
Option A
shut down because staying open would be more expensive
In the short run a firm must continue its operations if it can earn sufficient revenue to cover its variable cost. It means if price exceeds average variable cost a firm should continue to operate.
In this case,
Total revenue = $125,000
Total variable cost = $130,000
since the total revenue does not cover total variable cost, firm should shutdown its operations.