Final answer:
Calculating profits involves analyzing total revenue versus total cost, using the average cost curve to identify profit margins, understanding the shutdown point, and determining the immediate price that permits short-run operation while minimizing losses.
Step-by-step explanation:
When calculating profits by comparing total revenue and total cost, it's essential to consider all factors that can impact the profitability of discontinuing a business segment. Profits and losses can be identified with the help of the average cost curve which shows cost behavior as output changes. A critical point of consideration in this analysis is the shutdown point, which occurs when the price falls below the minimum average variable cost, making it unfeasible to continue production in the short run.
For example, in various scenarios where a Yoga Center is losing money, the decision to shut down or to continue operating depends on whether the revenue covers the variable costs and whether the firm can minimize losses. When the firm faces a scenario where the price is below average variable cost, the firm must shut down to prevent further losses. But if the firm can cover its variable costs and the losses are diminishing, it should remain open in the short run. Finally, if the firm consistently operates at a loss, and no improvements in revenue are projected, it should exit the business when feasible in the long run.