# Shut-Down Point
## Concept
When a business operates at a very low level of activity (e.g., during a slump), it may consider temporarily suspending operations to avoid certain fixed costs.
However, some fixed costs continue even when shut down (e.g., salaries of permanent staff, security, statutory dues). Hence shutting down is beneficial only if losses on operation exceed the unavoidable cost of remaining shut.
## Key Distinction
| Avoidable Fixed Cost | Unavoidable Fixed Cost |
|---|---|
| Will not occur once we shut down | Will be incurred even if we shut down |
| Example: monthly cleaning expenses, electricity, temporary labour | Example: salary of permanent workers, factory rent under lease, depreciation |
## Formula
$$\text{Shut-Down Point (units)} = \frac{\text{Avoidable Fixed Cost} - \text{Re-opening Cost}}{\text{Contribution per unit}}$$
Re-opening cost is the extra one-time cost the business will incur to restart operations later.
## Decision Rule
- **Any level of activity below the Shut-Down Point → it is cheaper to shut down**.
- Any level at or above → continue operating; contribution earned more than covers the avoidable fixed costs.
## Difference from BEP
- BEP considers all fixed costs (Total Profit = 0).
- Shut-Down Point considers only avoidable fixed costs (i.e., the comparison is between continuing vs. shutting).
- Hence Shut-Down Point is always lower than BEP.