Final answer:
A company should grant credit if it ensures profitability by comparing the variable costs and the sale price. The example provided indicates a gross profit, suggesting viability. Average variable costs play a crucial role in these business decisions.
Step-by-step explanation:
When a company is considering whether to grant credit to a new customer, it must assess the impact on its profitability. The provided scenario implies a variable cost per unit of $73 and a sale price of $140. To determine if offering credit is financially viable, the company would compare these costs to the potential revenue from sales to the new customer.
For example, if the center earns revenues of $20,000 with variable costs of $15,000, the gross profit would be $5,000, suggesting that the business operation is profitable and should continue. The average variable cost can also be a critical factor in such decisions. It's obtained by dividing the total variable cost by the quantity of output, like the case where $400 of variable cost for 80 haircuts leads to an average variable cost of $5 per haircut.
Decision-making in business often involves comparing price to average variable costs, as a price falling below the minimum average variable cost would necessitate a shutdown to prevent losses. In every scenario, understanding the relationship between costs, price, and output quantity is vital for determining whether a business should continue operations or if a firm should offer credit to a customer.