When is a firm’s shutdown point equal to the minimum point on its average cost curve?

 Question: When is a firm’s shutdown point equal to the minimum point on its average cost curve?

Solution: A firm’s shutdown point is equal to the minimum point on its average cost curve in the short run. This is because the average cost comprises of the sum of average fixed cost and the average variable cost. The average fixed cost has to be incurred by the firm even if the firm makes no business. Thus when a firm shuts down in the short run it will equal to the minimum point on its average cost curve.

Southridge Company incurred the following costs related to its purchase of a new assembly line

1. Southridge Company incurred the following costs related to its purchase of a new assembly line: Purchase cost: Php 9,435,000 (including Php 435,000 freight and purchase taxes)
Recoverable purchase taxes: Php 960,000
Irrecoverable purchase taxes: Php 870,000
Installation of assembly line: Php 975,000
Training of employees: Php 195,000
Estimated repair and maintenance costs over useful life: Php 500,000
What is the amount to be recognized as asset related to the assembly line?

a.	Php 11,280,000
b.	Php 9,450,000
c.	Php 9,645,000

Solution:

Answer: b) Php 9,450,000
Note:
1.As per IAS 16-Property Plant & Equipment, Employee Training cost will not be part of Assets capitalization. unless those cost is directly associated to bring assets to required condition & use as intended by management.
2. Repair & Maintenance cost can not be part assets capitalization..

	Php
Cost of New assembly	9,435,000.00
Less:Recoverable Tax	(960,000.00)
Add:Installation cost	975,000.00
Asset to be Recognized	9,450,000.00