Question

If the firms is operating at a level below break even level, it will ___________________.

• A. earn net profit on the quantity in excess of break even level quantity at the rate of contribution margin
• B. earn net profit on the total quantity sold at the rate of contribution margin
• C. incur loss on the quantity short of break even level quantity at the contribution margin
• D. incur loss on the quantity in excess of break even level quantity at the contribution margin

Answer 1

Answer: (C)

incur loss on the quantity short of break even level quantity at the contribution margin

Break even point refers to the situation where the company only earn normal profit which is included in the cost. At this point, total cost is equal to total revenue and any downward shift of revenue curve from this point will lead to losses for the firm.

Therefore, if the firm is operating below the break even point then they will incur loss on the quantity short of the break even level of quantity given the price of the commodity.