Nicholas Company manufactures a fast-bonding glue, normally producing and selling 42,000 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 $60 per litre, variable costs are $36 per litre, fixed manufacturing overhead costs in the plant total $241,500 per month, and the fixed selling costs total $323,400 per month. Strikes in the mills that purchase the bulk of the

If Nicholas Company does close down the plant, fixed manufacturing overhead costs can be reduced by $63,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $10,680. 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.

1-b. Would you recommend that Nicholas Company close its own plant?

multiple choice

No

Yes

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.)