10. Shutting Down or Continuing to Operate a Plant Nicholas Company manufactures
ID: 2468869 • Letter: 1
Question
10. Shutting Down or Continuing to Operate a Plant
Nicholas Company manufactures a fast-bonding glue, normally producing and selling 40,000 litres of the glue each month. This glue, which is known as MJ-7, is used in the wood industry to manufacture plywood. The selling price of MJ-7 is $35 per litre, variable costs are $21 per litre, fixed manufacturing overhead costs in the plant total $230,000 per month, and the fixed selling costs total $310,000 per month.
Strikes in the mills that purchase the bulk of the MJ-7 glue have caused Nicholas Company's sales to temporarily drop to only 11,000 litres per month. Nicholas Company's management estimates that the strikes will last for two months, after which sales of MJ-7 should return to normal. Due to the current low level of sales, Nicholas Company's management is thinking about closing down the plant during the strike.
If Nicholas Company does close down the plant, fixed manufacturing overhead costs can be reduced by $60,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $14,000. Since Nicholas Company uses lean production methods, no inventories are on hand.
Required:
Assuming that the strikes continue for two months, would you recommend that Nicholas Company close the plant? Explain. Show computations to support your answer.
Explanation / Answer
Solution:
Since, the loss will be higher if the plant is closed it would be advisable to continue operating the plant,
Particulars Amount Selling Price per unit 35 Less: Variable Cost per unit 21 Contribution per unit 14 Units Sold 40,000 Total Contribution 5,60,000 Less: Fixed Manufacturing Cost 2,30,000 Less: Fixed Selling Expenses 3,10,000 Net Income 20,000Related Questions
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