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Module 5: Differential Analysis
Module 5. REQUIREMENT
Assume that a manufacturing company produces 1000 units
with selling price at P5 each. Then the Total Revenue (TR)
is P5 × 1,000 units = P5,000. The Average Total Cost (AVC)
is P7,000 with a fixed cost (FC) of P4,000 and a variable
cost (VC) of P3,000 for all units.
Evidently, this manufacturing company is operating at a loss of
-P2,000 (economic loss). In economics, we assume that the
FC cannot be avoided. The company is then obliged to pay it
whether it operates or not. That is, if it closes its operations,
the revenue will be zero but still incur $4,000 fixed cost.
Should the manufacturing company shutdown its
operation? Create Computation as Proof of Answer
