Wendy quit her job as a lab technician which paid her $36 000 per year to start

Question

Wendy quit her job as a lab technician which paid her $36 000 per year to start a nursery business. She spent $12 000 of her savings, which had been earning 10% interest per year, on equipment for her business. She also borrowed $12 000 from the bank at 10% interest per year, which she also spent on equipment. For the past several months she has spent $1,000 per month on variable costs. Also, for the past several months she has earned $3,500 in monthly revenue. Based on this information, Wendy should ____ A.  continue operating her nursery in the short run, but exit the nursery industry in the long run B.  shut down her nursery in the short run, and exit the nursery industry in the long run Wendy quit her job as a lab technician which paid her $36 000 per year to start a nursery business. She spent $12 000 of her savings, which had been earning 10% interest per year, on equipment for her business. She also borrowed $12 000 from the bank at 10% interest per year, which she also spent on equipment. For the past several months she has spent $1,000 per month on variable costs. Also, for the past several months she has earned $3,500 in monthly revenue. Based on this information, Wendy should ____ A.  continue operating her nursery in the short run, but exit the nursery industry in the long run B.  shut down her nursery in the short run, and exit the nursery industry in the long run

Explanation / Answer

The sunk or fixed costs should not be taken into account while doing the analysis. So, monthly profit is $3500-$1000=$2500

Thus, yearly profit in the business is $2500x12=$30,000

Since it is lesser than $36.000 she should shut down, thus option 2 is correct.

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