Jon opens a video rental store. What factors should the consider in making his decision on what hours to operate each day?
The main thing that Jon needs to consider is the amount of revenue that he can bring in in a given hour compared to the cost of staying open. He will need to determine which hours will be popular enough with consumers for it to be worth his time to stay open. In doing this, he will need to consider his variable costs.
Jon will have both fixed and variable costs. His variable costs will include such things as his labor (if he has employees) and his electricity. His fixed costs will include rent on the building and whatever he has paid for the videos that he rents out.
What Jon needs to do is to make more money in any given hour than he incurs in variable costs in that hour. Any hour that meets that criteria is an hour in which he should be open. Let us say that Jon’s variable costs are $15 per hour. As long as he can exceed that much in rental revenue he should stay open. Therefore, what he needs to do is to determine how much it costs him (in variable costs) to stay open and then determine which hours of the day will yield enough video rentals to cover those costs.