EXAMPLE 3-6 Shutdown Analysis For the most recent financial reporting period, a business domiciled in Ecuador...

 

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EXAMPLE 3-6 Shutdown Analysis For the most recent financial reporting period, a business domiciled in Ecuador (which recognizes the U.S. dollar as an official currency) has revenue of $2 million and total costs of $2.5 million, which are or can be broken down into total fixed cost of $1 million and total variable cost of $1.5 million. The net loss on the firm's income statement is reported as $500,000 (ignoring tax implications). In prior periods, the firm had reported profits on its operations. 1. What decision should the firm make regarding operations over the short term? 2. What decision should the firm make regarding operations over the long term? 3. Assume the same business scenario except that revenue is now $1.3 million, which creates a net loss of $1.2 million. What decision should the firm make regarding operations in this case? EXAMPLE 3-6 Shutdown Analysis For the most recent financial reporting period, a business domiciled in Ecuador (which recognizes the U.S. dollar as an official currency) has revenue of $2 million and total costs of $2.5 million, which are or can be broken down into total fixed cost of $1 million and total variable cost of $1.5 million. The net loss on the firm's income statement is reported as $500,000 (ignoring tax implications). In prior periods, the firm had reported profits on its operations. 1. What decision should the firm make regarding operations over the short term? 2. What decision should the firm make regarding operations over the long term? 3. Assume the same business scenario except that revenue is now $1.3 million, which creates a net loss of $1.2 million. What decision should the firm make regarding operations in this case?

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Answer Explanation Solution to 1 In the short run the firm is able to cover all of its t... View the full answer