Skip to content

CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production

A firm's total revenue at an output of 200 units is ₹30,000 and its total cost at the same output is ₹33,000, of which ₹12,000 is fixed cost. Which statement best describes its position in the short run?

The firm should continue producing in the short run. Its revenue of ₹30,000 exceeds variable cost of ₹21,000, so it contributes ₹9,000 towards fixed cost and cuts its loss to ₹3,000. Shutting down would lose the full ₹12,000 fixed cost.

  1. AIt should continue producing, since revenue covers variable cost of ₹21,000 and contributes ₹9,000 towards fixed costCorrect
  2. BIt should shut down immediately, since total cost exceeds total revenue
  3. CIt is earning a profit of ₹3,000
  4. DIt is at break-even since average revenue equals average cost

Explanation

Variable cost = 33,000 − 12,000 = ₹21,000. Revenue of ₹30,000 exceeds this by ₹9,000, which offsets part of the fixed cost, so the loss is ₹3,000 rather than ₹12,000 if it shut down. The shut-down rule compares revenue with variable cost, not total cost.

Did you get it right without looking?

One question tells you little. A timed set on Cost of Production shows your real accuracy, how long you take and where you lose marks.

Practise Cost of ProductionFree diagnostic mock

More Cost of Production questions