At a recent meeting, the president and the CEO of Production, Inc. got into a he

Question

At a recent meeting, the president and the CEO of Production, Inc. got into a heated argument about whether or not to shut down the company%u2019s plant in Flint, Michigan. The plant currently loses $50,000/month. The president of Production, Inc. argued that the plant should continue to operate until a buyer is found for the facility. This argument was based on the fact that the plant%u2019s fixed costs are $61,000/month. The CEO disagreed over this point, arguing that fixed costs do not matter in making the shutdown decision.

Explanation / Answer

If the plant is operating, $50,000 a month is being lost.

If the plant were not operating, $61,000 a month is being lost.

Would you rather lose more or less money per month? If you want to be a successful business person, I would suggest you choose losing less, so it makes more sense to keep operating and losing $50,000 a month in the short run.

How would I explain it to the incorrect party? You have two choices. Choice 1: lose $50,000 a month. Choice 2: lose $61,000 a month. What constitutes that lose is irrelevant. It's lose $50,000 or $61,000 on the bottom line.

So President is wrong.

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