If a Firm Is Producing Where Price Exceeds Average Variable

question 4

Multiple Choice

If a firm is producing where price exceeds average variable cost, the firm should continue production even though it may incur a loss, since

• A) it is important to show stockholders that the company can turn itself around.
• B) it must adhere to union rules against layoffs.
• C) the loss will quickly revert to a profit.
• D) it can cover its variable costs (payroll, utilities, etc.) and have some funds left over to apply toward paying fixed costs.

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Definitions:

Retained Earnings

The total earnings of a company so far, minus any dividends or distributions given out to shareholders.

Closing Entries

Journal entries made at the end of an accounting period to transfer the balances of temporary accounts to permanent ones, preparing the books for the next period.

Retained Earnings

The portion of net income left over after dividends are paid out to shareholders, reinvested into the company's operations.

Closing Entries

Journal entries made at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts, thereby preparing the books for the next period.