Shutdown Point

What Is a Shutdown Point?

A shutdown point is a level of operations at which a company experiences no benefit for continuing operations and subsequently chooses to close down for a brief time — or sometimes permanently. It results from the combination of output and price where the company earns just sufficient revenue to cover its total variable costs. The shutdown point signifies the specific moment when a company's (marginal) revenue is equivalent to its variable (marginal) costs — as such, it happens when the marginal profit becomes negative.

How the Shutdown Point Works

At the shutdown point, there is no economic benefit to continuing production. On the off chance that an extra loss happens, either through a rise in variable costs or a fall in revenue, the cost of operating will offset the revenue.

By then, closing down operations is more functional than continuing. Assuming the reverse happens, it is more useful to proceed with production. On the off chance that a company can create revenues greater or equivalent to its total variable costs, it can utilize the extra revenues to pay down its fixed costs, expecting [fixed costs](/fixedcost, for example, lease contracts or other extensive obligations, will in any case be incurred when the firm closes down. At the point when a company can earn a positive contribution margin, it ought to stay in operation regardless of an overall marginal loss.

A shutdown point can apply to each of the operations a business participates in or just a portion of its operations.

Special Considerations

The shutdown point does exclude an analysis of fixed costs in its determination. It depends completely on deciding when the marginal costs associated with operation surpass the revenue being produced by those operations.

Certain seasonal businesses, for example, Christmas tree farmers, may close down for the most part during the slow time of year. While fixed costs stay during the shutdown, variable costs can be wiped out.

Fixed costs are the costs that stay paying little heed to what operations are occurring. This can incorporate payments to keep up with the rights to the facility, like rent or mortgage payments, alongside any base utilities that must be kept up with. Least staffing costs are viewed as fixed on the off chance that a certain number of employees must be kept up with even when operations cease.

Variable costs are all the more closely tied to genuine operations. This can incorporate however isn't limited to, employee wages for those whose positions are tied straightforwardly to production, certain utility costs, or the cost of the materials required for production.

Types of Shutdown Points

The length of a shutdown might be transitory or permanent, contingent upon the idea of the economic conditions leading to the shutdown. For non-seasonal goods, an economic recession may reduce demand from consumers, driving a brief shutdown (in full or in part) until the economy recovers.

Different times, demand evaporates totally due to changing consumer inclinations or innovative change. For example, no one produces cathode-beam tube (CRT) TVs or computer screens any more, and it would be a losing prospect to open a factory these days to deliver them.

Different businesses might experience changes or produce a few goods all year, while others are just created seasonally. For instance, Cadbury chocolate bars are delivered all year, while Cadbury Cream Eggs are viewed as a seasonal product. The fundamental operations, zeroed in on the chocolate bars, may stay operational all year, while the cream egg operations might go through periods of a shutdown during the slow time of year.

Features

• At the point when a company can earn a positive contribution margin, it ought to stay in operation notwithstanding an overall marginal loss.
• A shutdown point is a level of operations at which a company experiences no benefit for continuing operations and consequently chooses to close down briefly — or at times permanently.
• Shutdown points depend altogether on deciding when the marginal costs associated with operation surpass the revenue being created by those operations.
• A shutdown point results from the combination of output and price where the company earns just sufficient revenue to cover its total variable costs.