A firm sells1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.The firm should
A)Shut-down as the firm is making a loss of $10,000 per week
B)Shut-down as the firm cannot cover the fixed costs
C)Continue operating as the firm is covering all the variable costs and some of the fixed costs
D)Shut-down because it is cost effective to pay off the remaining fixed costs

Question

Quizplus · Accepted Answer

The firm is covering all its variable costs and some of its fixed costs, which means that it is making a contribution towards covering its fixed costs. As long as the contribution is positive, the firm should continue to operate. In this case, the contribution per unit is $5 ($15 - $10), and the total contribution per week is $5,000 (1000 units x $5). This amount is contributing towards covering the fixed costs, and therefore, the firm should continue to operate.

A Firm Sells1000 Units Per Week