Irwin M. Fletcher runs a ball bearings company with the following production costs.
Irwin also has a fixed factory rental cost of $100.
Quantity Total Variable Costs
0 $0
1 $50
2 $70
3 $90
4 $140
5 $200
6 $360
The market price of a case of ball bearings is $50. Irwin is contemplating shutting down
his company. Calculate Irwin’s profits if he shuts down compared to his profits if he stays
open. What advice can you give him about shutting down?
To calculate Irwin's profits if he shuts down, we need to consider his total revenue and total costs.
If Irwin shuts down, his total revenue would be $0 since he would not be selling any ball bearings. His total costs would be $100 (fixed factory rental cost). Therefore, his profits if he shuts down would be:
Profit = Total Revenue - Total Costs
Profit = $0 - $100
Profit = -$100
If Irwin stays open, we can calculate his profit for each quantity of ball bearings produced using the formula:
Profit = Total Revenue - Total Costs
Profit = (Price per case x Quantity) - Total Variable Costs - Fixed Factory Rental Cost
For example, if Irwin produces 4 cases of ball bearings:
Profit = ($50 x 4) - $140 - $100
Profit = $200 - $140 - $100
Profit = -$40
We can calculate the profit for each quantity and compare it to the profit if he shuts down. Based on the calculations, it seems that Irwin will have negative profits regardless of the quantity of ball bearings produced.
Therefore, it may be advisable for Irwin to consider shutting down his company as he is currently incurring losses. Continuing to operate at a loss may not be sustainable for the long term. It may be worth considering other alternatives or strategies to reduce costs or increase revenues before making a final decision.