Two firms, C and D, both produce coat hangers.The price of coat hangers is $1.20 each.Firm C has total fixed costs of $750,000 and variable costs of 30'per coat hanger.Firm D has total fixed costs of $400,000 and variable costs of 50' per coat hanger.The corporate tax rate is 40%.If the economy is strong, each firm will sell 2,000,000 coat hangers.If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the total revenue of firm C will be

Question

Quizplus · Accepted Answer

For Firm C,
Total cost = Fixed cost + Variable cost
= $750,000 + 30 x 2,000,000
= $750,000 + $60,000,000
= $60,750,000
Total revenue = Price x Quantity
= $1.20 x 2,000,000
= $2,400,000
Taxable income = Total revenue - Total cost
= $2,400,000 - $60,750,000
= -$58,350,000
Since the taxable income is negative, there is no tax to be paid.
Hence, the net income for Firm C is $2,400,000.
For Firm D,
Total cost = Fixed cost + Variable cost
= $400,000 + 50 x 2,000,000
= $400,000 + $100,000,000
= $100,400,000
Total revenue = Price x Quantity
= $1.20 x 2,000,000
= $2,400,000
Taxable income = Total revenue - Total cost
= $2,400,000 - $100,400,000
= -$98,000,000
Since the taxable income is negative, there is no tax to be paid.
Hence, the net income for Firm D is $2,400,000.

Since both firms have the same revenue, and Firm C has higher fixed costs than Firm D, Firm C's net income will be higher than Firm D's net income.
Therefore, the best choice is D.

Two Firms, C and D, Both Produce Coat Hangers