Which of the following divisions should a firm continue to operate in order to earn profits?

• A. A division where total revenue equals total cost
• B. A division where fixed costs are higher than variable costs
• C. A division where total cost exceeds total revenue
• D. A division where total revenue exceeds total cost

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the profit condition for a firm or division. Profit is calculated as total revenue minus total cost, i.e., \(\text{Profit} = \text{Total Revenue} - \text{Total Cost}\).
2. Step 2: Analyze the first option where total revenue equals total cost. Here, profit is zero because \(\text{Total Revenue} = \text{Total Cost}\), so the division breaks even but does not earn a profit.
3. Step 3: Consider the second option where fixed costs are higher than variable costs. This information alone does not determine profitability because profit depends on total revenue relative to total cost, not just the composition of costs.
4. Step 4: Evaluate the third option where total cost exceeds total revenue. In this case, the division incurs a loss because \(\text{Total Cost} > \text{Total Revenue}\), resulting in negative profit.
5. Step 5: Conclude that the division should continue to operate only if total revenue exceeds total cost, i.e., \(\text{Total Revenue} > \text{Total Cost}\), which means the division is earning a positive profit.