(Note: This type of decision is similar to dropping a product line.) Nicholas Company manufactures a fast-bonding glue, normally producing and selling 56,000 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 $55 per litre, variable costs are $33 per litre, fixed manufacturing overhead costs in the plant total $322,000 per month, and the fixed selling costs total $431,200 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 14,000 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 $84,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $12,240. Since Nicholas Company uses lean production methods, no inventories are on hand. Required: 1-a. Assuming that the strikes continue for two months, compute the increase or decrease in income from closing the plant.
(Note: This type of decision is similar to dropping a product line.) Nicholas Company manufactures a fast-bonding glue, normally producing and selling 56,000 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 $55 per litre, variable costs are $33 per litre, fixed manufacturing overhead costs in the plant total $322,000 per month, and the fixed selling costs total $431,200 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 14,000 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 $84,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $12,240. Since Nicholas Company uses lean production methods, no inventories are on hand. Required: 1-a. Assuming that the strikes continue for two months, compute the increase or decrease in income from closing the plant.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Required:
1-a. Assuming that the strikes continue for two months, compute the increase or decrease in income from closing the plant.
Net income is
Yes
1-b. Would you recommend that Nicholas Company close its own plant?
No
by
Level of sales
in two months
2. At what level of sales (in litres) for the two-month period should Nicholas 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 portion of your break-even computation should
include only those fixed costs that are relevant (i.e., avoidable) over the two-month period.)
litres in two months
Transcribed Image Text:(Note: This type of decision is similar to dropping a product line.) Nicholas Company manufactures a fast-bonding glue, normally
producing and selling 56,000 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 $55 per litre, variable costs are $33 per litre, fixed manufacturing overhead costs in
the plant total $322,000 per month, and the fixed selling costs total $431,200 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 14,000
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 $84,000 per month and fixed
selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $12,240. Since Nicholas Company
uses lean production methods, no inventories are on hand.
Required:
1-a. Assuming that the strikes continue for two months, compute the increase or decrease in income from closing the plant.
Net income is
O Yes
by
1-b. Would you recommend that Nicholas Company close its own plant?
No
in two months
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