Question

Say you are the manager of a perfectly competitive firm selling a product. Your business is making a loss because total revenue is less than total costs. What would you do--shut down or continue to operate? Use hypothetical numbers to explain. Information you need to provide include--state the product you are selling, the price of the product, the quantity of the product you produce, fixed costs, total cost, figure out total revenue, total and average variable costs. Then go ahead and make your decision. Explain carefully why it makes better sense to shut down rather than continue to operate or to continue to operate rather than shut down, as the case may be. How do fixed costs play a role in your analysis? What is the difference between shutting down and going out of business?

Answer 1

If a firm temporarily suspends production due to matters of financial loss, is a shutdown of business, if a firm opts to “go out-of-business” primarily due to continual financial losses the business is inoperable and no longer conducting transactions.

My firm produces unique custom women shoes. This is a web based business which employs 5 designers including myself. The shoes feature materials such as feathers, spikes, studs, and jewels. The most popular shoe is the jeweled shoes, specifically the Crystal pump, this shoe is priced at $500. The company goal is to produce 25 shoes per week. There are 5 designers on the team including myself. The fixed cost is $5,000 per month which includes employee wages, business maintenance, and advertising. The total cost is $17,500. Suddenly business has slowed and we are only producing 10 shoes per month. It would be more beneficial for the business to remain operable and produce as orders are received. Although we are losing 10,000 per month, I am still able to afford the fixed cost. Since the entire staff is not needed in production of lower quantities of the product, I can temporarily lay-off and save by paying off less in wages. The fixed cost plays a major role in continuation of operation because without business maintenance, products could not be produced, nor could wages be paid to employees. Also, lack of visual recognition would hinder attracting more clients, if we were unable to advertise. If we continue to work as normal production will eventually resume to full capacity. Any unresolved debt would be settled at that time.

Answer 2

I feel that my business would be selling Video Games.

Now there would pretty much be a fixed price of $60 for the new games. and roughly $30 for the moderately old, and then any where from 10-5 for the really old games.

These prices are, if I am correct, decided by the company that produced the game. I would just be retail.

Now as for closing the store...I wouldn't. I would attempt to stay open for as long as I could. After all, starting a business about becoming an Entrepreneur. A risk taker. So if you try to take the safe route you won't make any money.

Now as for the decrease in revenue. Perhaps it's just a phase, this particular industry has those phases, because sometimes it'll take a good popular game to be able to spark something. Another thing to take into account is the amount of competition that is near by. If there is too much competition, you'll have to think of a unique way to make your stuff stand out.

Now as far as fixed costs go, you can't just freely change the prices...so competition can be a little difficult to deal with. But it also makes it a pretty even race. It mostly matters at this point how close you are to most of the public, or if your in a populated area.

Well the question however, was that which made more sense.

I suppose shutting down makes more sense, since your essentially not making money, and it's pretty obvious your not gonna make any money any time soon. It lets you get out while your ahead if you think of it that way.