Heavy Duty Company normally produces and sells 30,000 units of E30 each month. E30 is a small electrical relay used in automotive industry as a component part in various products. The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead costs total P 150,000 per month, and fixed selling costs total P 30,000 per month. Employment-contract strikes in the companies that purchase the bulk of the E30 have caused company’s sales to temporarily drop to only 9,000 units per month. Heavy Duty Company estimates that the strikes will last for about two months, after which time sales of E30 should return to normal. Due to the current low level of sales, Heavy Duty Company is thinking about closing the closing down its own plant during the two months strikes are on. If the company does close down its plant, it is estimated that fixed manufacturing overhead costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total P 8,000. Since Heavy Duty uses JIT system, no inventories are on hand. Required: (Support your answers by showing your computations.) 1. Would you recommend that the plant should be closed for two months? Explain. 2. At what sales level for the two-month period should Heavy Duty be indifferent between temporarily closing the plant or keeping it open?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Heavy Duty Company normally produces and sells 30,000 units of E30 each month. E30 is a small electrical relay used in automotive industry as a component part in various products. The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead costs total P 150,000 per month, and fixed selling costs total P 30,000 per month. Employment-contract strikes in the companies that purchase the bulk of the E30 have caused company’s sales to temporarily drop to only 9,000 units per month. Heavy Duty Company estimates that the strikes will last for about two months, after which time sales of E30 should return to normal. Due to the current low level of sales, Heavy Duty Company is thinking about closing the closing down its own plant during the two months strikes are on. If the company does close down its plant, it is estimated that fixed manufacturing overhead costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total P 8,000. Since Heavy Duty uses JIT system, no inventories are on hand. Required: (Support your answers by showing your computations.) 1. Would you recommend that the plant should be closed for two months? Explain. 2. At what sales level for the two-month period should Heavy Duty be indifferent between temporarily closing the plant or keeping it open?

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