Susan quit her job as a teacher,which paid her $36,000 per year,in order to start her own catering business.She spent $12,000 of her savings,which had been earning 10 percent interest per year,on equipment for her business.She also borrowed $12,000 from her bank at 10 percent interest,which she also spent on equipment.For the past several months she has spent $1,000 per month on ingredients and other variable costs.Also for the past several months she has taken in $3,500 in monthly revenue.

Question

Quizplus · Accepted Answer

In the short run, Susan should continue to operate her business as her monthly revenue of $3,500 is greater than her variable cost of $1,000 per month. However, she is not making a profit as she has not yet earned enough revenue to cover her fixed costs (the $24,000 spent on equipment and borrowed funds). In the long run, it is unlikely that Susan will be able to earn enough revenue to cover her fixed costs and make a profit, so it is best for her to exit the industry.

Susan Quit Her Job as a Teacher,which Paid Her $36,000