Asked • 11/01/20

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?

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.
Report

11/05/20

1 Expert Answer

By:

Raymond B. answered • 11/26/20

Tutor
5 (1)

Math, microeconomics or criminal justice

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