Page 33 - Managerial Accounting-MGT 145
P. 33
Module 5: Differential Analysis
Shutdown Point of Production Decision Case
The shut-down point refers to the minimum price where
companies prefer shutting down their operation instead of
continuing to operate. In other words, it is the minimum price and
quantity for keeping operations open.
The variable cost per unit (written as marginal cost (MC) on the
following graph) falls with an increase in the number of units
produced, up to a certain point. After this point, the variable cost rises.
Consequently, a U-shaped curve is realized when quantity is plotted
on the x-axis against the product price on the y-axis.
Break Even Point is the point where the variable cost/(MC) equals the average total
cost (ATC). The shut-down point of production, on the other hand, is the price &
quantity at which the (MC) falls below the (ATC). The company is better off
stopping or shutting down its production at P1,Q1.
