Answer to Question #152738 in Management for Indira

Question

During a coffee-room debate among several young M.B.A.s who had recently graduated, one of the young executives flatly stated, “The most this company can lose on its
Brazilian division is the amount it has invested (its fixed costs).” Not everyone agreed
with this statement. In what sense is this statement correct? Under what circumstances
could it be false? Explain.

Answer 1

Fixed costs are business expenses that are independent of the number of goods and services produced by a company. These expenses are less controllable and examples include rent, interests, labor, and other expenditures that recur periodically. Consequently, the above statement can be true in the sense that without them the business cannot run. Losing the invested amount will mean operational costs are not covered. However, the same statement can be challenged by the fact that fixed costs can be decreased per unit especially when high amounts of goods and services are produced. This implies that the fixed costs are not the most important expenditure after all because they rely on variable costs. In cases where the fixed costs are directly connected to the production, the statement can be incorrect.