how the shutdown point works
at the shutdown point there is no economic benefit to continuing production if an additional loss occurs either through a rise in variable costs or a fall in revenue the cost of operating will outweigh the revenue at that point shutting down operations is more practical than continuing if the reverse occurs continuing production is more practical if a company can produce revenues greater or equal to its total variable costs it can use the additional revenues to pay down its fixed costs assuming fixed costs such as lease contracts or other lengthy obligations will still be incurred when the firm shuts down when a company can earn a positive contribution margin it should remain in operation despite an overall marginal loss a shutdown point can apply to all of the operations a business participates in or just a portion of its operations special considerationsthe shutdown point does not include an analysis of fixed costs in its determination it is based entirely on determining at what point the marginal costs associated with operation exceed the revenue being generated by those operations certain seasonal businesses such as christmas tree farmers may shut down almost entirely during the off season while fixed costs remain during the shutdown variable costs can be eliminated fixed costs are the costs that remain regardless of what operations are taking place this can include payments to maintain the rights to the facility such as rent or mortgage payments along with any minimum utilities that must be maintained minimum staffing costs are considered fixed if a certain number of employees must be maintained even when operations cease variable costs are more closely tied to actual operations this can include but is not limited to employee wages for those whose positions are tied directly to production certain utility costs or the cost of the materials required for production types of shutdown pointsthe length of a shutdown may be temporary or permanent depending on the nature of the economic conditions leading to the shutdown for non seasonal goods an economic recession may reduce demand from consumers forcing a temporary shutdown in full or in part until the economy recovers other times demand dries up completely due to changing consumer preferences or technological change for instance nobody produces cathode ray tube crt televisions or computer monitors any longer and it would be a losing prospect to open a factory these days to produce them other businesses may experience fluctuations or produce some goods year round while others are only produced seasonally for example cadbury chocolate bars are produced year round while cadbury cream eggs are considered a seasonal product the main operations focused on the chocolate bars may remain operational year round while the cream egg operations may go through periods of a shutdown during the off season 