Final answer:
The question pertains to the excess of actual or expected sales over breakeven sales and represents the safety margin before incurring a loss. Businesses must decide whether to continue operating at a loss or shut down, based on which option minimizes losses. The breakeven point is crucial in this decision-making process.
Step-by-step explanation:
The concept you're asking about is related to the cushion that a company has between making a profit and incurring a loss, which is the excess of actual or expected sales over breakeven sales. This cushion signifies how much sales can decrease before the company starts to experience losses.
In business terms, if a company's revenues are not covering its variable costs, it may continue to operate in the short run, hoping that the situation improves. However, if the losses are sustained over the long run, the company may have to choose between continuing to produce at a loss or shutting down entirely.
This decision is based on which option results in the least loss, with shut down often being the eventual outcome if losses persist. Figure 8.6, as mentioned, would illustrate that to avoid losses, a firm's price must exceed its average variable costs.
When operating below the breakeven point, a firm must decide whether the lesser of two losses is to keep producing or to shut down. This dilemma is central to exit strategies for businesses facing extended periods of financial downturn.