3. John is quite concerned about his small restaurant as the revenue generated from sales are below the
total costs of running the restaurant. John asks for your opinion on whether she should close down the
business or not. Additionally, he’s already committed to paying for one year of rent, electricity, and
employee salaries. Therefore, even if the business were to shut down, John would still incur these costs
unil the year-end. In January, the business reported revenues of $ 2500, but incurred total cost of $
3500, for a net loss of $ 1000. John estimates that February should experience revenues similar to that
of January. John’s list of costs for the restaurant is as follows;
A. January fixed costs:
• Rent: $900
• Electricity: $200
• Employee salaries: $400
•
B. January variable expenses:
• Raw material: $1,500
• Total cost of labor: $500
Ans;
If John didn’t close down,
John estimates that February should experience revenues similar to that of January.
A. January’s fixed cost = $1500
B. January’s variable cost = $2000
Total cost John has to pay= $3500
Net loss = $3500 - $2500
= $1000
If John closed down,
He is already committed to pay for a year rent, electricity, and employee salaries.
Hence, there will be no revenue and variable cost will be $0 too.
Net loss = Total cost – Revenue
= $1500
Therefore, John shouldn’t close down his small restaurant.
