Shut Down Point for Operations
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Please help with the following problem.
A firm has fixed costs of $100,000. The selling price is $25 per unit of output. Average variable costs are lowest (equal to $20 per unit) at 1000 units of output.
What advice would you give to this firm in the short run (without being able to change the costs or output level) relative to operating or shutting down and why?
In the long run (without being able to change the costs or output level) relative to operating or shutting down and why?
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Solution Summary
This posting explains the calculation of shut down point through an example.
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Shut Down point will be the output level at which price equals average variable cost and losses equal total fixed costs, whether the firm produces or not. Also the lowest point on the Average Variable Cost curve at which Average Variable Cost=Marginal Cost.
"Variable costs," which increase directly in proportion to the level of sales in dollars or units sold. Depending on your type of business, some examples would be cost of goods sold, sales ...
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