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 enters a recession, the tax of firm C will be
A) $1,680,000.
B) $750,000.
C) $510,000.
D) $204,000.

Question

Quizplus · Accepted Answer

In a recession, Firm C sells 1,400,000 coat hangers. Revenue = 1,400,000 * $1.20 = $1,680,000. Variable costs = 1,400,000 * $0.30 = $420,000. Total costs = $420,000 + $750,000 (fixed costs) = $1,170,000. Profit before tax = $1,680,000 - $1,170,000 = $510,000. Tax = $510,000 * 40% = $204,000.

Two Firms, C and D, Both Produce Coat Hangers