Profit and the Shut Down Decision, Essay Example

Why might a profitable motel shut down in the long run if the land on which it is located becomes extremely valuable due to surrounding economic development? What kinds of costs are involved in making a decision to shut down?

The reason for this type of situation that may occur in the future is depending on the economic feasible factors that come into the play. There are three or four different types of costs that are relevant in decision making to whether to shut down. Of these are the avoidable, unavoidable, and common costs and they are defined as the avoidable cost— to discontinue operations. Unavoidable costs—to continue part of operations. Common costs are those costs of facilities and services that are shared by users (i.e., heating swimming pool, spa, laundry, etc.).  As the motel may consider the operational resources, such as housekeeping, maintenance and repair, motel room furnishings, personal toilettes supplies, and landscaping.  Hence, while the location is economically developing the valuation of the location at the peak of the growth, the profit may be higher than it would be in next five or ten years due to the cycle that could affect the force of growth, for example, the escrow fees or the property taxes or the department of transportation taxes and fees could be applied to offset the business costs. It is good to use these external financial factors into accounting to aid in decision making because it is a good deal if you think of profits earned between now to next five to ten years down the road.  The value of the land sometimes could become a profit than what the price for the land originally cost. If you come to think of depreciation. Because if the land is paid in full and is not depreciating the value of the land then it would mean that the marginal contribution cost for whole operation has gained in revenues. Even though, the marginal contribution cost to break even between the assets, liabilities, and sales of goods sold, against unavoidable fixed cost expenses could burden the total net earnings.

Work Cited

Horngren, C., Sundem, G., & Stratton, W. Introduction to Management Accounting. Upper Saddle River, NJ; Pearson Prentice Hall. 2005.