Frank owns a soda fountain and sells milkshakes. he sells 50 milkshakes per day for $5 each. his daily cost is $290, of which $30 is fixed cost. what can you say about Franks short run decision regarding shut down and his long run decision regarding exit?
please help me out !
(290-31)/50
= $5.2 (bigger than $5)
he should shutdown because in short run cannot be operate so in the long run and exist business also cannot be operate
To analyze Frank's short run decision regarding shutdown and long run decision regarding exit, we will need to consider his daily revenue and daily total cost.
To calculate the daily revenue, we multiply the number of milkshakes sold per day by the price of each milkshake:
Daily Revenue = Number of milkshakes sold per day × Price per milkshake.
In this case, the number of milkshakes sold per day is 50, and the price per milkshake is $5:
Daily Revenue = 50 milkshakes × $5 = $250.
Next, let's calculate the daily total cost. We know the total daily cost is $290, with $30 being the fixed cost. So, we need to determine the variable cost:
Variable Cost = Daily Total Cost - Fixed Cost.
Variable Cost = $290 - $30 = $260.
Finally, we can determine Frank's daily profit or loss by subtracting the daily total cost from the daily revenue:
Daily Profit/Loss = Daily Revenue - Daily Total Cost.
Daily Profit/Loss = $250 - $290 = -$40.
Now, let's analyze the decisions:
Short Run Decision regarding Shutdown:
In the short run, Frank should consider shutting down if the loss incurred by continuing operations is greater than the loss incurred by shutting down. In this case, Frank's daily loss is -$40. If he shuts down, he will avoid this daily loss.
Long Run Decision regarding Exit:
In the long run, Frank should consider exiting the market if he is consistently incurring losses over an extended period. Since Frank's daily loss is -$40, he needs to evaluate whether this loss is sustainable in the long run. If it is not sustainable and there is no expectation of improvement, he may decide to exit the market.
In summary, based on Frank's daily loss of -$40, he should consider shutting down in the short run to avoid further loss. In the long run, if the losses continue, he should consider exiting the market.
To analyze Frank's short-run decision regarding shutdown and long-run decision regarding exit, we need to compare his revenues and costs.
In the short run, Frank needs to consider his fixed costs and the revenue he generates from selling milkshakes. His fixed cost is $30 per day.
Revenue from selling milkshakes: Frank sells 50 milkshakes per day for $5 each, so the daily revenue from milkshake sales is 50 * $5 = $250.
Total cost in the short run: In addition to the fixed cost of $30, he has other variable costs. Let's assume the variable costs per milkshake are $2. This means that his variable costs per day are 50 * $2 = $100.
So, Frank's total cost in the short run is $30 (fixed cost) + $100 (variable cost) = $130.
Now, let's consider his short-run decision regarding shutdown. If his total cost exceeds his total revenue, it may be advisable for him to shut down temporarily, as staying open would result in losses. Here, his total revenue is $250, which is greater than his total cost of $130, so it is not necessary for him to shut down in the short run.
Moving on to the long-run decision regarding exit, Frank should consider his fixed costs and whether it is financially sustainable for him to continue his business in the long term. If his total revenue consistently falls below his total cost, it may be rational for him to exit the business.
To determine this, we need additional information about Frank's long-run revenue and cost trends. If over a longer period, his revenue consistently falls below his total cost, and he anticipates that this pattern will continue, it may be wise for Frank to consider exiting the business in the long run.
However, without further information on long-term revenue and cost projections, we cannot conclusively determine Frank's long-run decision regarding exit.