Discussion
Assertion: a plant making an accounting loss should always be closed. Reason: its revenue does not cover its total cost.
Answer: D
Correct answer: the assertion is false although the reason offered is a true statement in itself
The reason correctly describes what an accounting loss means, but the assertion does not follow. Only avoidable costs are relevant to a closure decision: if the plant covers its variable costs and any fixed costs that closing would save, then closing makes the firm worse off by the contribution it would lose, and the unavoidable overhead continues to be borne regardless. A plant showing a loss on its allocated overhead may be well worth keeping.
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