Short Run Shut Down Rule

Short Run Shut Down Rule

William Dawson

American InterContinental University

Short Run Shut Down Rule

        To find out if a company is able to successfully make a profit on the products they produce various calculations will be used to find the gains or losses in a company. Total variable cost will consist of finding out how much it cost the company to pay their employees by the hour, and how much is cost to manufacture the product from materials. Total cost will calculate the cost to the company to pay workers, to pay for materials, and the daily cost to operate machines. Also building rent, utilities, taxes and other liabilities are calculated. The total revenue from selling the products will be calculated. The average variable cost will calculate the dollar amount the company pays for labor and material divided into how many units are produced. The labor, material, machinery, rent, utilities, and any other liabilities will be added together and divided into how many units of product are produced to get the average total cost of running the business.  And finally there will be profit and loss calculation that will subtract the total cost of running the business from total revenue sales of selling the product.

Calculations from Assignment

 Total Variable Cost = (Number of Workers x Worker’s Daily Wage) + Other Variable Costs 

(400,000 $80.00) + $400,000= $3,600,000[pic 1]

Total Costs = Total Variable Costs + Total Fixed Costs

3,600,000 + $900,000 = $4,500,000

Total Revenue = Price * Quantity 

$41.00  100,000 = $4,100,000[pic 2]

Average Variable Cost = Total Variable Cost / Units of Output per Day

$3,600,000/100,000 = $36.00

Average Total Cost = (Total Variable Cost + Total Fixed Cost) / Units of Output per Day

$3,600,000 + $900,000/100,000

$4,500,000/100,000 = $45.00

Profit/Loss = Total Revenue – Total Costs

$4,100,000 – 4,500,000 = -400,000

        This results in a loss of revenue for the company. But when you explain the Short Run Shut Down Rule an answer is given in whether the company should shut down or keep producing.  A company should keep operating in the short run if total revenue is greater than the total cost to run operations. If the product price is larger than the average variable cost keep running the company, and if the price is less than average variable cost then the company should close down (Editorial Board, 2012). According to the calculations above, total revenue is $4,100,000, and total variable cost is $3,600,000. So in the short run the company should keep operations going.