Final answer:
True, reviewing expenses that change over time, known as variable costs, is essential for accurately projecting operating expenses. Fixed costs remain constant, whereas variable costs fluctuate with business activity. Decisions on whether to keep a business operational in the short term depend on the ability to cover variable costs despite losses.
Step-by-step explanation:
It is true that in projecting the operating expenses for the second and third years, it is helpful to first look at those expenses that will likely change over time. Expenses that vary depending on production levels or revenue, such as cost of goods sold, raw materials, or direct labor, are known as variable costs. These costs will fluctuate with the level of business activity. In contrast, fixed costs, such as rent, salaries for permanent staff, and insurance, do not vary with production levels in the short run. Understanding these concepts is vital when a business is not meeting its revenue targets.
In the provided scenario, we discuss three different outcomes for a Yoga Center. In all cases, if revenue does not improve, the long-term plan is to exit the business when the rental contract expires. Short-term decisions, however, vary: the center must shut down if variable costs exceed revenues as in scenarios 1 and 2. However, if revenue covers variable costs with some losses, as in scenario 3, it might make sense to stay open in the short term.