Question

Jared runs a personal training studio, earning $5,000 last month. His fixed costs are $4,000, and his variable costs are $3,500. Should Jared shut down his business immediately?a) Yes, because he is clearly losing money.

b) Yes, because $5,000 cannot cover his fixed costs.
c) No, because $5,000 covers his fixed costs.
d) No, because $5,000 covers his variable costs.

Answer 1

Correct answer is C. No, because $5,000 covers his fixed costs

Step-by-step explanation:

Jared should not shut down immediately his business despite of the loses for the month. Earnings for the month can still cover the fixed cost of the period and there is still a huge possibility that it can recover in the forthcoming periods. Matching principle in recognition of income might also be a reason for the said loses. Jared should still forgo in running the business.