Question

An entrepreneur is trying to decide whether to stay open for business or shut down. Future operating revenues are estimated to be $18 million, future operating costs are estimated to be $14 million, and sunk costs are $8 million. What should the entrepreneur do? o Continue to operate to pay down sunk costs. o Shut down because the sunk costs are greater than zero. o Continue to operate since operating revenues exceed operating costs. o Shut down because operating revenues do not cover the operating costs and sunk costs.

Answer 1

OK, here are the key factors to consider in this decision:

Operating revenues: $18 million

Operating costs: $14 million

Sunk costs: $8 million

The sunk costs have already been incurred, so they should not factor into the decision to continue operating or shut down. The relevant metrics are the future operating revenues and costs.

Operating revenues exceed operating costs, so continuing to operate would generate a profit and positive cash flow.

The choice that should be selected is:

Continue to operate since operating revenues exceed operating costs.

Options o and d focus on the sunk costs, which are irrelevant. The entrepreneur should base the decision on the future revenues and costs of continuing operations, not the past sunk costs. As long as the business can generate a profit and positive cash flow going forward, it makes sense to remain open.

So in summary, the entrepreneur should continue operating this business since the estimated future operating revenues of $18 million exceed the estimated future operating costs of $14 million.

Let me know if you have any other questions!