ote: This type of decision is similar to dropping a product line.) Nicholas Company manufactures a fast-bonding g oducing and selling 72,000 litres of the glue each month. This glue, which is known as MJ-7, is used in the wood anufacture plywood. The selling price of MJ-7 is $55 per litre, variable costs are $33 per litre, fixed manufacturing the plant total $414,000 per month, and the fixed selling costs total $554,400 per month. ikes in the mills that purchase the bulk of the MJ-7 glue have caused Nicholas Company's sales to temporarily dr 000 litres per month. Nicholas Company's management estimates that the strikes will last for two months, after v 1-7 should return to normal. Due to the current low level of sales, Nicholas Company's management is thinking at wn the plant during the strike. Nicholas Company does close down the plant, fixed manufacturing overhead costs can be reduced by $108,000 ed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $7,880. Sine mpany uses lean production methods, no inventories are on hand. -quired. Assuming that the strikes continue for two months, compute the increase or decrease in income from closing t et income is decrease by $ 792,000 in two months
ote: This type of decision is similar to dropping a product line.) Nicholas Company manufactures a fast-bonding g oducing and selling 72,000 litres of the glue each month. This glue, which is known as MJ-7, is used in the wood anufacture plywood. The selling price of MJ-7 is $55 per litre, variable costs are $33 per litre, fixed manufacturing the plant total $414,000 per month, and the fixed selling costs total $554,400 per month. ikes in the mills that purchase the bulk of the MJ-7 glue have caused Nicholas Company's sales to temporarily dr 000 litres per month. Nicholas Company's management estimates that the strikes will last for two months, after v 1-7 should return to normal. Due to the current low level of sales, Nicholas Company's management is thinking at wn the plant during the strike. Nicholas Company does close down the plant, fixed manufacturing overhead costs can be reduced by $108,000 ed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $7,880. Sine mpany uses lean production methods, no inventories are on hand. -quired. Assuming that the strikes continue for two months, compute the increase or decrease in income from closing t et income is decrease by $ 792,000 in two months
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
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 72,000 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 $414,000 per month, and the fixed selling costs total $554,400 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
18,000 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 $108,000 per month and
fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $7,880. 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
decrease
by $792,000 in two months
1-b. Would you recommend that Nicholas Company close its own plant?
Yes
No
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.)
Level of sales
7,250 litres in two months
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