Mr Capps Recently Built a Dental Floss Factory in Montana

question 59

Multiple Choice

Mr. Capps recently built a dental floss factory in Montana. It cost $500,000 and is expected to last ten years. The plant can only be used to produce dental floss and will have no scrap value. When a recession occurs, the yearly revenue from the plant declines to $35,000, compared to costs of $25,000 just for the variable resources required to produce the current rate of output. Mr. Capps should

• A) shut down since he is experiencing economic losses (in other words, he will not get his $500,000 back).
• B) reduce the price of dental floss if his demand is inelastic in order to increase his revenue.
• C) raise the price of dental floss if his demand is elastic in order to increase his revenue.
• D) continue to operate since he is covering his variable costs and the cost of the plant is a sunk cost.

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Definitions:

Significant Component

A part or element of an asset that is substantial enough to require separate accounting due to its size or value.

Continuing Operations

Refers to the business activities that are expected to continue into the foreseeable future, as opposed to those that are being discontinued.

Discontinued Operations

The disposal of a significant component of a business.

Generally Accepted Accounting Principles

A set of accounting standards and procedures used in the United States to govern financial reporting and ensure consistency across organizations.