Question

If revenues are greater than total variable costs of production but less than total costs, a firm A) earns a profit. B) suffers a loss. C) breaks even. D) shuts down.

Answer 1

Answer:

C) breaks even.

Explanation:

Cost-volume-profit analysis is also known as the break even analysis, it is an important tool in predicting the volume of activity, the costs to be incurred, the sales to be made, and the profit to be earned is. It is used to determine how changes in differing levels of activities such as costs and volume affect a company's operating income and net income.

Hence, if revenues are greater than total variable costs of production but less than total costs, a firm breaks even because the amount of money being generated is greater than the cost of running the business.

Answer 2

Answer: B) suffers a loss.

Explanation:

If revenue is less than total costs, it means that the company is incurring losses because profit is calculated by deducting costs from revenue.

Just because the variable costs are being covered does not mean that the company will make a profit. All costs need to be covered for profit to be made. If the Average variable costs become more than the average revenue, the company should shutdown.