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Requirement: 1. Should ABC continue or shut down operation? 2. What is the shut down point?

Requirement: 1. Should ABC continue or shut down operation? 2. What is the shut down point?

FINANCIAL ACCOUNTING
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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ABC Co. is producing a single product. During the last six months, the sales of the product declined due to Covid. ABC projected that this will continue for the next six months. The owner is contemplating on whether he should shut down the production of the product for the next 6 months and just open when the situation gets better. Given below is his projected revenues and expenses for the next 6 months: Sales (P100/unit @ 15,000 units per month Annual depreciation of factory = P150,000 Variable Man. Cost = P60/unit Variable S& A Cost= P23/unit Annual Depreciation of Equipment = P600,000 Annual Salary of Production Supervisor = P300,000 Allocated Fixed Manufacturing OH = P1500,000 Fixed Selling & Administrative Expenses = 1200,000 If the company decides to shutdown the operation for 6 months, the equipment and factory can be rented out to another company for P50,000 per month. ABC projected that the situation will be back to normal after 6 months, however, due to long time of not producing, start-up costs of P25,000 must be incurred when it resumed operation. Requirement: 1. Should ABC continue or shut down operation? 2. What is the shut down point?
Transcribed Image Text:ABC Co. is producing a single product. During the last six months, the sales of the product declined due to Covid. ABC projected that this will continue for the next six months. The owner is contemplating on whether he should shut down the production of the product for the next 6 months and just open when the situation gets better. Given below is his projected revenues and expenses for the next 6 months: Sales (P100/unit @ 15,000 units per month Annual depreciation of factory = P150,000 Variable Man. Cost = P60/unit Variable S& A Cost= P23/unit Annual Depreciation of Equipment = P600,000 Annual Salary of Production Supervisor = P300,000 Allocated Fixed Manufacturing OH = P1500,000 Fixed Selling & Administrative Expenses = 1200,000 If the company decides to shutdown the operation for 6 months, the equipment and factory can be rented out to another company for P50,000 per month. ABC projected that the situation will be back to normal after 6 months, however, due to long time of not producing, start-up costs of P25,000 must be incurred when it resumed operation. Requirement: 1. Should ABC continue or shut down operation? 2. What is the shut down point?
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