How do you tell if a firm should continue to produce or shut down when given costs?
You are the owner of an ice cream shop that earns a profit most of the year except during the cold winter months. During the month of December, your rent and other fixed costs amount to a total of $200. If you remain open, your total variable costs (workers, ice cream cones, etc.) will amount to $300. If you would be able to sell 100 ice cream cones at $4 each during December, what should this firm do?
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1 Expert Answer
FC=200
VC =300
TC = 500
TR=400
In the short run you more than cover VC, so you stay in business at least temporarily as you're stuck with fixed costs for a time, until you sell the business or go into bankruptcy.
In the long run you'll sell and shut down to cut your costs to zero with zero revenue and no losses
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Charlie D.
The ice cream shop should continue to operate in December. If the shop closes, the owner must pay the fixed costs of $200 with no revenue, for a loss of $200. If she continues to operate, she will pay $200 in fixed costs plus $300 in variable costs for a total of $500 in costs and will have $400 in revenues. Her loss will be $100 ($500 in costs minus $400 in revenue). So the owner of the ice cream shop will suffer a smaller loss by operating in December than she would by shutting down. The general rule is that if operating revenues exceed variable costs, the business should continue to operate.11/05/20