Final answer:
Noel Sandwich Shop's fixed costs are $5000, variable costs are $2000, and the total operating costs are $13000. To continue in business, revenues must cover these costs.
Step-by-step explanation:
Understanding Business Costs
When operating a business, such as Noel Sandwich Shop, it's crucial to understand and calculate different types of costs. Specifically, total fixed costs are costs that do not change with the level of output, such as leasing the building or equipment. In this scenario, the total fixed costs are $5000 ($2000 for equipment leasing and $3000 for building leasing). Total variable costs are costs that vary with production levels, like the cost of food, which amounts to $2000 here.
Adding both fixed and variable costs, we arrive at total operating costs, which is $13000 ($5000 in fixed costs and $8000 in wages and food). Overhead costs are general business expenses that are not directly tied to creating a product or service. In this case, the total overhead costs would include the leasing of equipment and building, totaling $5000.
For a business to remain viable, the revenues must cover both variable and fixed costs. For instance, if a center earns revenues of $20,000 while incurring variable costs of $15,000, it should continue in business since the revenue covers the variable costs and contributes to the fixed costs. However, if revenues drop to $10,000 while variable costs remain at $15,000 (exceeding the revenue), the center should consider shutting down.
Cost-Benefit Analysis in Decision Making
Businesses ultimately perform a cost-benefit analysis to determine their continuity. Revenue exceeding total costs indicates a business can operate profitably. It is invaluable to understand these cost structures for making informed strategic decisions.