Accounting

Anonymous
timer Asked: May 3rd, 2014
account_balance_wallet $5

Question Description

A plant can remain operating when sales are depressed?

Tutor Answer

duingpung
School: Purdue University

A) if the selling price per unit exceeds the vairable cost per unit
- this is a viable reason to keep operating as some of the excess reduces the effect of fixed costs on the bottom line.

b) to help the local economy
- this is unsustainable unless continued operations are meant to keep the local economy going in order to attract other investments. Long term this is going to reduce ROE.

c) In an effort to cover at least some of the variable cost
- poor reason to continue. If only part of the variable costs are covered then each unit produced increases the overall costs and decreases overall profit of the company.

d)unless variable costs are zero when production is zero
- not enough information to evaluate this option, as this may be true as well as option a, or it may be that this is true but a certain threshhold must be met beyond which the plant is profitable. More information would be necessary to make this analysis. Are sales depressed beyond the point of any profit? If so, then in this instance operations should cease, even if only temporarily.

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Anonymous
Thanks, good work

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