Question

A shoe manufacturer is producing at a point where its marginal costs are $5 and its fixed costs are $5000. At the current price of $10 it is producing 500 pairs. If the demand goes down, such that they can now only charge $8 per pair, should they continue production in the short run?

Answer 1

Answer:

In a short time, as long as the product line can be sold with a positive contribution margin, the company should continue selling it.

Explanation:

Giving the following information:

UNitary variable cost= $5

Fixed costs are $5000.

Sales= 500 units

Selling price= $8

First, we need to calculate the current income:

Income= 500*(8-5) - 5000= -$3,500

In a short time, as long as the product line can be sold with a positive contribution margin, the company should continue selling it. Demand can increase and income could become positive.