Suppose you decided to open a copy store.You rent store (signing a one year leas

Question

Suppose you decided to open a copy store.You rent store (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 blocks 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?

Explanation / Answer

You should continue operating your business. Since the revenue you receive covers your variable costs, the wages of your employees and cost of paper, and utilities, and contributes partially to your fixed costs, namely a part of the interest on the loan you took to purchase the copiers and a part of your rent. Now the rent and interest on the loan you took out are fixed costs and have to be incurred in the short run. If you stop operating the business , you might not be able to recover part of your fixed costs and might shut down,

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