Question

On the opposite side of the street is a community-run ladies-only gym named Sculptress, which has branches throughout the city. Sculptress allocates an average of $50 per member on local media advertising. The gym follows a policy of offering an inexpensive, friendly, and no-frills service, aiming for a substantial membership base to ensure success. Sculptress realizes profits of $600 per customer per year, with an average customer lifespan of 3 years. They anticipate a 5% annual loss of members and apply a 10% discount rate per year to consider the time value of money. For simplicity, Sculptress assumes all profits are accrued at the beginning of the year.

Answer 1

Business decisions in scenarios where a firm faces losses depend on the ability to cover variable costs. Without adequate revenue, the firm should minimize losses by avoiding variable costs. Long-term viability should be assessed to decide on continuing or exiting the business.

Step-by-step explanation:

When analyzing business decisions regarding whether to continue operations or shut down, it's essential to consider both fixed and variable costs and compare them to the revenue generated. In the provided scenarios of the Yoga Center, different decisions need to be made based on the center's ability to cover variable costs and minimize losses. In short-run decision-making:

• With no clients and no revenues, only fixed costs of rent are incurred, so it's best to shut down and incur only fixed costs.
• If revenues do not cover variable costs (payment for yoga instructors), shutting down to avoid increased losses is more sensible.
• When revenues cover variable costs and reduce losses, continuing the operation in the short run is advised.

Ultimately, if the business's long-term revenue outlook does not improve, it should consider exiting the business once the rental contract expires to avoid continual losses.

It also mentions the gym's focus on offering an inexpensive and friendly service to attract a substantial membership base. Based on this information, it is possible to analyze the financial aspects and decisions involved in running a community-run ladies-only gym like Sculptress.