Nakuru Manufacturing limited operates at normal capacity. It manufactures 800,000 units of a product per year. The unit cost manufacturing at normal capacity is as follows: Kshs. Direct materials 20.00 Direct labour 7.00 Variable overheads 5.00 Fixed overheads 10.00 Selling price 50.00 During the next three months. only 40,000 units can be produced and sold. Management plans to shut down the factory, estimating that the manufacturing overhead can be reduced to Kshs.296,000 for the quarter when the factory is not operating; the fixed
Nakuru Manufacturing limited operates at normal capacity. It manufactures 800,000
units of a product per year. The unit cost manufacturing at normal capacity is as follows:
Kshs.
Direct materials 20.00
Direct labour 7.00
Variable overheads 5.00
Fixed overheads 10.00
Selling price 50.00
During the next three months. only 40,000 units can be produced and sold. Management
plans to shut down the factory, estimating that the manufacturing overhead can be
reduced to Kshs.296,000 for the quarter when the factory is not operating; the fixed
overhead costs are incurred at uniform rate throughout the year. Additional costs of
factory shutdown for 3 months are estimates at Kshs.56,OOO.
Examine if the factory should shut down for 3 months with relevant calculations.
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