Strikes in The Mills

Problem 12-26 Shutting Down or Continuing to Operate a Plant [LO2] (Note: This type of decision is similar to dropping a product line) Nicholas Company manufactures a fast-bonding glue, normaly producing and seling 48,000 litres of the glue each month. This glue, which is known as MU-7, is ured in the wood industry to manufacture plywood.

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The selling price of
MJ.7
is
$50
per litre, variable costs are
$30
pet litre, fred manufacturing overhead costs in the plant total
$276,000
per menth, and the foped selling costs total Strikes in The Mills
$369,600
per menth. Strikes in the mills that purchase the bulk of the MJ-7 glue have caused Nicholas Company’s sales to temperany drop to only
12.000
litres per month Nicholas Company’s management estimates that the strikes will last for two months, atter which sales of MU-7 should return to normal. Due to the current low level of sales, Nicholas Company’s management is thinking about cloring down the piant during the strike. If Nicholas Company does close down the plant, fued manufacturing overhead costs can be reduced by
$72,000
per month and fixd selling cosis can be reduced by 10x. Start-up conte at the end of the shutdown period would totar
$17.920.5 Strikes in The Mills
ince hecholas Company uses lean production methods, no invertories are on hand. Pequired: 19. Assuming that the strikes continue for two months, compute the increase or docrease in income from closing the piant 1-b. Would you recommend that Nicholas Company close its own plant? 2. At what level of soles (in I Lres) for the two-month period should Nicholms Company be indifferent between closing the plant and keeping it open? (Hint. This is a type of break-even analysis, except that the fixed-cost porton of your break-even con outation ahould include only those fived costs that are relevant (i.e, avoidable) over the two-month period) Strikes in The Mills

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