Question

Suppose you decided to open a copy store. You rent store space (signing a one year lease), and you take out a loan at the local bank and use the money to purchase 10 copiers. Six month later a large chain opens a copy store two blacks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wages of your employees, and the cost of paper and utilities, does not cover all of your rent and the interest rate and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your business? Explain

a. Should shut down because total revenue does not cover all my costs and I earn a loss

b. Should operate at loss because I have some total revenue left to cover fixed cost

c. Should shut down and accept the total loss equal to fixed cost

d. Should shut down because I will be not able to compete with the large copy store

Answer 1

a. Should shut down because total revenue does not cover all my costs and I earn a loss

Step-by-step explanation:

In the example, after the large copy store open two blocks away, the copy store that you own is not covering all the costs. What it earns, is only covering employee wages, the cost of materials, and utilities, but it is not allowing you to pay rent and the bank loan.

For this reason, the financial situation is too dire to continue, and the copy store should be shut down. Afterwards, a new agreement with the bank should try to be reached in order to refinance the loan.