Final answer:
When actual activity is lower than a static budget's expectations, variable costs typically present unfavorable variances due to lower production levels. Fixed costs remain constant in total, but they can show variances on a per-unit basis. The best course of action depends on comparing ongoing losses against the costs of shutting down.
Step-by-step explanation:
When Hoppy Corporation compares monthly operating results to a static budget and actual activity is less than budgeted, it's likely that variable costs will show unfavorable variances, since variable costs vary directly with the level of output. For fixed costs, the cost per unit would increase if fewer units are produced, but the total fixed cost would remain constant, potentially creating an unfavorable variance as well. Nevertheless, focusing on variable costs, if production volume is down, fewer variable inputs like labor and raw materials are used, leading to variance.
Using Figure 8.6 as a reference, which indicates that the firm should aim to minimize losses, it suggests that when prices fall below the firm's average variable cost (AVC), it might be better to shut down to avoid incurring variable costs on top of fixed costs. However, fixed costs do not change with the level of production or sales, so these costs will remain the same whether the company operates or shuts down.
The strategic decision depends on whether continuing operations with the given price is beneficial. The failure to cover average variable costs indicates that operating leads to greater total losses than shutting down.