A Firm Has Excess Capacity, and Has Received an Order

question 110

Multiple Choice

A firm has excess capacity, and has received an order for 50 000 units at $20 each over and above its normal production activity of 600 000 units. To meet this order, new equipment at a cost of $200 000 would have to be bought, and this equipment would have to be scrapped after the order had been filled. The firm currently sells for $50 per unit, has variable costs of $15.80, and fixed costs of $600 000. What is the additional profit (loss) for the firm if it accepts the order?

• A) Loss of $10 000
• B) Profit of $40 000
• C) Loss of $40 000
• D) Profit of $10 000

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Definitions:

Sole Proprietorship

A sole proprietorship is a form of business owned and run by one individual, where there is no legal distinction between the owner and the business.

Unlimited Liability

A legal structure in which owners are personally responsible for all of the company's debts and liabilities without limit.

Limited Liability

A legal structure where a company's owners are protected from personal liability for the company's debts or liabilities.