Question

Stu owns an ice cream parlor that is usually closed during the winter. This winter, however, Stu is considering opening his business in February instead of March. If Stu opens his store in February, he will earn total revenue of $4,000 for the month, incurring variable costs of $3,500 and fixed costs of $1,500. If the store remains closed during February, Stu will earn no revenues and incur fixed costs of $1,500. Stu should:

Answer 1

Open in February

Step-by-step explanation:

Let's examine the revenus and costs for both scenarios:

Stu DOES NOT open in February:

Revenues: $0

Costs: $1,500 (fixed costs)

Difference: - $1,500 (loss of $1,500)

Stu DOES open in February:

Revenues: $4,000

Costs: $5,000 ($1,500 fixed costs + $3,500 variable costs)

Difference: - $1,000 (loss of $1,000)

So, by opening in February, he'll reduce his loss for that month by $500 ($1,500 vs $1,000).