Final answer:
The choice between continuing production or shutting down depends on whether the market price is above or below the company's average variable costs. The Waterway Company values inventory based on the lower of cost or market, which affects financial statements. Long-term production decisions involve cost-revenue analysis and consideration of market structure.
Step-by-step explanation:
The question concerns the decision-making process that a company follows when it is operating at a loss. Businesses often have to choose between continuing to produce and incurring smaller losses or shutting down to prevent further losses. A critical factor in this decision is the comparison of the market price with the company's average variable costs and fixed costs. If the market price is higher than the average variable costs but lower than the average total costs, it might still be preferable for the firm to continue operating in the short run to cover a portion of the fixed costs, minimizing overall losses. However, if the price is below the average variable costs, it is generally better for the company to shut down immediately to prevent larger losses.
In the context of the Waterway Company, the amount of the company's inventory would be valued based on the lower of cost or market value for each individual item. This valuation method helps ensure that the inventory is not overvalued on the balance sheet in the face of market price fluctuations or potential losses.
Production in the Long Run
From a long-run perspective, companies aim to maximize profits by analyzing both costs and revenues, including fixed and variable costs, to determine the best quantity to produce and price to charge. This is influenced by the market structure the company operates within, and decisions are made accordingly.