Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Fixed costs must be paid regardless of the level of production.
B
Understanding fixed costs can help a business decide when to shut down operations.
C
Fixed costs vary directly with the output level.
D
Businesses should ignore fixed costs when calculating potential profits.
E
Fixed costs can lead to losses if total revenue does not cover them.
Understanding the Answer
Let's break down why this is correct
Answer
Fixed costs are expenses that do not change regardless of how much a business produces or sells. This means that even if a company makes no sales, it still has to pay these costs, like rent or salaries. In decision-making, understanding fixed costs helps businesses figure out how much they need to sell to cover all their expenses and start making a profit. For example, if a bakery has fixed costs of $1,000 a month, it needs to sell enough pastries to cover that amount before it can earn any profit. Therefore, knowing fixed costs is crucial for planning and making smart financial choices.
Detailed Explanation
Other options are incorrect because Some people think fixed costs change with production levels; It's a common mistake to think fixed costs help decide when to stop a business.
Key Concepts
Fixed Costs
Business Decision-Making
Profit Maximization
Topic
Understanding Fixed Costs and Decisions
Difficulty
easy level question
Cognitive Level
understand
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