Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It will encourage the firm to increase production to spread fixed costs over more units.
B
It will lead the firm to reduce production since fixed costs cannot be altered.
C
It will have no impact on the firm's pricing strategy.
D
It will compel the firm to eliminate fixed costs entirely.
Understanding the Answer
Let's break down why this is correct
Answer
When a manufacturing firm has high fixed costs, it means that a large amount of money is spent on things that do not change with the level of production, like rent and salaries. This situation affects decision-making because the firm needs to sell enough products to cover these fixed costs and make a profit. For example, if a factory has fixed costs of $100,000, it must ensure that its sales exceed this amount to avoid losses. As a result, the firm may decide to lower prices to attract more customers, or it might increase production levels to spread those fixed costs over more units. This careful balancing act is crucial for the firm's financial health and overall success.
Detailed Explanation
When fixed costs are high, making more products helps spread those costs out. Other options are incorrect because Some might think that high fixed costs mean making fewer products is better; It's a common mistake to think fixed costs don't affect pricing.
Key Concepts
fixed costs
cost structure
decision-making process
Topic
Understanding Fixed Costs and Decisions
Difficulty
hard level question
Cognitive Level
understand
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