Asked by Aditya Venkat on May 11, 2024
Verified
Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. If the economy enters a recession, the after-tax profit of Firm B will be
A) $0.
B) $6,000.
C) $36,000.
D) $60,000.
E) None of the options are correct.
Variable Costs
Costs that change in proportion to the level of production or business activity, such as materials and labor.
Fixed Costs
Costs that do not change with the level of production or sales, such as rent, salaries, and insurance.
After-tax Profit
The net income remaining after all taxes have been deducted from total revenue.
- Calculate and analyze firm profitability under different economic conditions.
Verified Answer
KW
Kendel WibbingMay 16, 2024
Final Answer :
E
Explanation :
In a recession, Firm B sells 1,100,000 widgets. Revenue = 1,100,000 widgets * $1/widget = $1,100,000. Variable costs = 1,100,000 widgets * $0.75/widget = $825,000. Total costs = Fixed costs + Variable costs = $240,000 + $825,000 = $1,065,000. Profit before tax = Revenue - Total costs = $1,100,000 - $1,065,000 = $35,000. After-tax profit = Profit before tax * (1 - Tax rate) = $35,000 * (1 - 0.4) = $35,000 * 0.6 = $21,000. None of the provided options match this calculation.
Learning Objectives
- Calculate and analyze firm profitability under different economic conditions.