if a paper mill shuts down its operations for three months so that it produces nothing is __ will be reduced to zero? a) fixed costs b) opportunity costs c) variable costs d) total cost
The correct answer and explanation is:
The correct answer is c) variable costs.
Explanation:
Variable costs are costs that change directly with the level of production or output. These include expenses like raw materials, direct labor, and energy used in the production process. If a paper mill shuts down its operations completely for three months and produces nothing, the variable costs during that period will be reduced to zero because no materials are being used, and production-related labor or energy costs will not be incurred.
Fixed costs, on the other hand, are expenses that remain constant regardless of the level of production. Examples include rent, property taxes, insurance, and salaries of permanent staff. Even if the mill stops production for three months, these fixed costs will still need to be paid because they do not depend on production levels.
Opportunity costs represent the potential benefits the company misses out on when choosing one alternative over another. In this context, the opportunity cost would be the profit lost by not producing and selling paper during the shutdown. Opportunity costs are not costs that are paid out in cash, so they do not drop to zero during a shutdown.
Total cost is the sum of fixed costs and variable costs. Since fixed costs remain unchanged during the shutdown and variable costs drop to zero, total costs will decrease but will not become zero because fixed costs still have to be covered.
Therefore, when the paper mill stops producing entirely, only variable costs will be reduced to zero. Fixed costs continue, opportunity costs remain as lost potential profits, and total costs will decrease but not become zero. Understanding this distinction helps businesses make better financial decisions when considering temporary shutdowns or production changes.