Reviewed by Oct 05, 2020| Updated on
A point at which a businessman thinks that there is no benefit in continuing the business operations and decides to shut down the business either temporarily or permanently is called the shutdown point. This situation could be a result of output and price where the business earns just the revenue enough to cover the total variable costs. Shutdown point occurs exactly when the marginal profit of the business reaches a negative scale.
At the shutdown point, no economic benefit is seen to continue production. If there is an additional loss—either a rise in variable costs or a drop in revenue, the cost of operations may outweigh the revenue. In this situation, shutting the business down is the better choice than to continue it. If the situation is reversed, then continuing the business would be a better option.
The fixed costs are not analysed when determining the shutdown point. It only considers the marginal costs associated with operations exceeding the revenue generated. Seasonal businesses, such as Christmas tree farming may remain shut during the off-season in an attempt to eliminate the variable costs of the business.
In another case, consider the example of Cadbury chocolates. Though they produce chocolates across the year, they produce seasonal products, such as Cadbury Cream Eggs and Dairy Milk Silk Heart Pop. Only the production of these two products will be shut down in the off-season.
The length of the temporary shutdown may vary based on several natural and economic factors. An economic recession can also make a reason for the shutdown of certain non-seasonal product making businesses. They may have to remain shut until the economic conditions get better.
Changing consumer preferences and the advancement in technology may also be the cause for a business to shut down. The widespread use of mobile phones made the purpose of telegrams useless. After this division of post offices suffered for a long time, they decided to shut the division down for good.