Reference no: EM132814501
Auto Parts, Inc. is medium-sized company that manufactures and distributes small auto parts in Rochester, New York. The company currently loses $25,000 per month. The average price for all the auto parts sold each month is $5.00. The monthly average fixed costs and monthly variable costs for the factory are respectively $6,000 and $4,000.
The owner of the company is evaluating whether she should shut down the factory or continue to operate it. She thinks that the factory should continue to operate until the economic environment improves and buyer for the factory can be identified. The logic of the owner is that her company has already invested millions of dollars in the factory over the years. The CEO of Auto Parts, Inc. thinks the factory should be shut down because virtually all monthly fixed costs ($30,000/month) are sunk costs.
What is the firm's monthly total revenue?
What are the company's total variable costs and total fixed costs?
Provide a recommendation as to whether Auto Parts, Inc. should shut down its factory or continue to operate it.
Explain the logic of your argument, including a numerical demonstration.