Final answer:
To break even, the minimum selling price must be equal to the sum of variable and fixed costs. When operating at a loss, a company must decide whether to continue producing or to shut down, choosing the option that minimizes losses.
Step-by-step explanation:
In order to break even, your minimum selling price must be equal to your variable costs plus your fixed costs. During a situation where a firm is operating below the break-even point, where price equals average cost, the firm is experiencing a loss. To remain open and continue operations, the price at which goods are sold must exceed the firm's average variable cost. There are two scenarios that a firm may face if it's operating at a loss:
- Continue to produce and lose money
- Shutdown and possibly lose less money
In choosing between these options, the preferable choice is the one that results in the least amount of financial loss.