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.

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.