Nicholas Company manufactures a fast-bonding glue, normally producing and selling 40,000 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 $35 per litre, variable costs are $21 per litre, fixed manufacturing overhead costs in the plant total $230,000 per month, and the fixed selling costs total $310,000 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 11,000 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 $60,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $14,000. Since Nicholas Company uses lean production methods, no inventories are on hand.
Required:
1. Assuming that the strikes continue for two months, would you recommend that Nicholas Company close the plant? Explain. Show computations to support your answer.
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? Show computations.