A Corporation Has Been Steadily Losing Money on One of Its

question 41

Multiple Choice

A corporation has been steadily losing money on one of its product lines, plastic flamingo lawn ornaments. The firm produces plastic flamingos in a factory that cost $20 million to build 10 years ago. The firm is now considering an offer to buy that factory for $15 million. Which of the following statements about the decision to sell or not to sell is correct?

• A)The firm should turn down the purchase offer because the factory cost more than $15 million to build.
• B)The $20 million spent on the factory is a sunk cost; that cost should not affect the decision.
• C)The $20 million spent on the factory is an implicit cost, which should be included in the decision.
• D)The firm should sell the factory only if it can reduce its costs elsewhere by $5 million.

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Definitions:

Liquidity and Efficiency

Financial metrics that evaluate how quickly a company can meet its short-term obligations with its available assets and how effectively it utilizes its resources.

Solvency

The ability of an entity to meet its long-term financial obligations and continue its operations in the long term.

Profitability

The degree to which a business or activity yields profit or financial gain.

Financial Statement Analysis

The process of examining and analyzing a company's financial statements to make better economic decisions.