Shutdown Point

AAA

DEFINITION of 'Shutdown Point'

A point of operations where a firm is indifferent between continuing operations and shutting down temporarily. The shutdown point is the combination of output and price where a firm earns just enough revenue to cover its total variable costs.

INVESTOPEDIA EXPLAINS 'Shutdown Point'

If a firm is operating at its shutdown point, it is usually operating at a loss. The concept is that if a firm can produce revenue greater or equal to its total variable costs, it can use the additional revenue to pay down its fixed costs. This assumes that fixed costs will still be incurred when a firm shuts down, such as lease contracts or other lengthy obligations. In other words, when a firm can earn a positive contribution margin, it should remain in operations, despite an overall loss.

RELATED TERMS
  1. Discontinued Operations

    A segment of a company's business that has been sold, disposed ...
  2. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  3. Variable Cost

    A corporate expense that varies with production output. Variable ...
  4. Economics

    A social science that studies how individuals, governments, firms ...
  5. Microeconomics

    The branch of economics that analyzes the market behavior of ...
  6. Contribution Margin

    A cost accounting concept that allows a company to determine ...
RELATED FAQS
  1. How is overhead distributed through total absorption costing?

    Through total absorption costing, overhead is distributed into indirect costs incurred from the manufacturing and production ... Read Full Answer >>
  2. How can individuals or businesses handle transaction costs for economic externalities?

    Externalities, also known as external economies, and transaction costs are two significant and evolving issues in contemporary ... Read Full Answer >>
  3. Why should management teams focus more on horizontal integration?

    Management teams should focus more on horizontal integrations because they allow for economies of scale, economies of scope, ... Read Full Answer >>
  4. How do externalities represent profit opportunities?

    Economic externalities expose market transactions where the full costs or benefits of economic activity are not being internalized ... Read Full Answer >>
  5. What components are factored in determining net sales?

    The key components that factor into determining net sales include revenue, sales returns, allowances and discounts. Essentially, ... Read Full Answer >>
  6. What are the differences between absorption costing and variable costing?

    Absorption costing includes all costs, including fixed costs, in figuring the cost of production, while variable costing ... Read Full Answer >>
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  3. Fundamental Analysis

    Spotting Profitability With ROCE

    This straightforward ratio measures whether a company is efficient, money-making or neither.
  4. Economics

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
  5. Economics

    What is Deadweight Loss?

    Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
  6. Economics

    The Big Chill: What’s Wrong With The U.S. Consumer

    Based on the most recent April data, investors may, once again, be disappointed when the second-quarter gross domestic product (GDP) report comes in.
  7. Economics

    Explaining Tier 1 Capital

    Tier 1 capital refers to the core capital a bank must maintain in relation to its assets.
  8. Personal Finance

    Can Electric Cars Replace Gas Guzzlers?

    High costs and poor battery performance have deterred many from switching to electric cars, which begs the question: can electric cars replace gas guzzlers?
  9. Economics

    Explaining Business Risk

    Business risk is the risk associated with the overall operations of a business entity.
  10. Fundamental Analysis

    How to Calculate a Combined Ratio

    Combined ratio is a formula used in the insurance industry to measure the performance of an insurance company.

You May Also Like

Hot Definitions
  1. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  2. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  3. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  4. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
Trading Center