Discussion
A plant with revenue of 800 000, variable costs of 700 000 and fixed costs of 250 000, of which 100 000 are avoidable by closing, should
Answer: B
Correct answer: keep operating, revenue covering variable plus avoidable fixed cost
Only the avoidable costs are relevant to a closure decision. The plant earns a contribution of \( 800\,000 - 700\,000 = 100\,000 \), which exactly meets the 100,000 of fixed cost that closing would save; the other 150,000 continues either way and is irrelevant. Closing would therefore save nothing and would lose whatever the plant contributes in future. The accounting loss of 150,000 is the unavoidable overhead and is not a reason to close.
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