Question

7.(10 points Fran is considering permanently closing down her beauty salon. A consultant advises her that if she stays open for business, she will have operating revenues of $300,000 and operating costs of $280,000. In addition, Fran has paid $40,000 for fixtures that can be resold for $15,000 after she closes the beauty salon. a. What is the value of Fran's beauty salon if it remains open? b. What is the value of Fran's beauty salon if she closes it? c. Explain whether Fran should close down the beauty salon.

Answer 1

Ans. Operating revenue, R = $300000

Operating Cost, C = $280000

Fixed Cost, F = $40000

Salvage value of fixtures, S = $15000

a) If it remains open, its value will be = R - C - F + S = 300000 - 280000 - 40000 + 15000 = -$5000

b) If the salon closes down, its value will be = S - F = 15000 - 40000 = -$25000

c) The salon should not shut down its operations because after shut down its value will be less than its value when it continues its operations.

Also, its loss if it continues its operations will be $20000 but if it shuts down, its loss will increase to $25000. So, to avoid increase in loss, the salon should not shut down its operations.

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