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24 January, 08:10

Suppose that in the second year her average total cost per dog is $35 and that $20 of that is associated with the variable cost. She finds that the market price for dog grooming has fallen, however, to $30 per dog. Should she stay open or close the business? Briefly explain your answer.

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  1. 24 January, 08:21
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    She should stay open, because the revenue of from dog grooming ($30 per dog), is still high enough to cover her variable cost of $20 per dog, even though she is operating at a loss.

    Explanation:

    Profit = Revenue - Total costs

    Total costs = Fixed costs + variable costs

    Profit = $30 - $35 = - $5 per dog

    This shows she is operating at a loss of $5 per dog.

    If a company does not make enough revenue to cover its total costs, then it is operating at a loss.

    However such a company must consider its variable cost before deciding whether to shut down.

    A company should only shut down if it is unable to make enough revenue to cover its variable cost.

    If a company is operating at a loss but can at least cover its variable cost, then it should stay open at least in the short run.
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