At a recent board meeting, the president and CEO got into a heated argument about whether to shut down the firm's plant in Miami. The Miami plant currently loses $60,000 monthly. The president of the firm argued that the Miami plant should continue to operate, at least until a buyer is found for the production facility. The president's argument was based on the fact that the plant's fixed costs are $68,000 per month. The CEO exploded over this point in considering the shutdown decision. Accodring to the CEO, everyone knows fixed costs don't matter.

Question

At a recent board meeting, the president and CEO got into a heated argument about whether to shut down the firm's plant in Miami. The Miami plant currently loses $60,000 monthly. The president of the firm argued that the Miami plant should continue to operate, at least until a buyer is found for the production facility. The president's argument was based on the fact that the plant's fixed costs are $68,000 per month. The CEO exploded over this point in considering the shutdown decision. Accodring to the CEO, everyone knows fixed costs don't matter.
a. Should the Miami plant be closed or continue to operate at a loss in the short run?
b. How would you explain to the incorrect party that he or she is wrong?

economyst · Answer

Take a shot, what do you think? Hint: fixed costs matter.