Final answer:
Cutoff testing ensures transactions are recorded in the correct accounting period. Firms calculate profits by comparing total revenue with total cost and assess profitability with the average cost curve. The shutdown point is when prices only cover variable costs, influencing short-run production decisions. Therefore, the correct option is B.
Step-by-step explanation:
In response to the student's question, the objective of cutoff testing in accounting is B) whether transactions are recorded in the correct accounting period. This is crucial for ensuring that financial statements are accurate and comply with the principle of revenue recognition, which states that revenue should be recorded in the period it was earned, not necessarily when it was received.
To calculate profits, contrast the total revenue with the total cost. If total revenue exceeds total cost, the firm is profitable. Losses are identified when total cost exceeds total revenue. By analyzing the average cost curve, firms can pinpoint where they break even or incur losses.
The shutdown point is the level of output and price at which a firm's revenue can cover only its variable costs. If the market price falls below this point, the firm should cease production in the short run to minimize losses.
To determine the price at which a firm should continue producing in the short run, it needs to assess whether the price covers at least the average variable costs. If it does, then the firm can cover its variable costs and contribute to fixed costs, making it worthwhile to keep operating.