Nicholas company manufactures rugs. His company is situated in a small town and is having a labour crisis. He is operating at 50% capacity level and manufactures 2,000 rugs per year and each rug on an average sell at Rs 10,000.

Direct material 5,000 per unit

Direct labour 2,000 per unit

Variable overhead 1,000 per unit

Manufacturing overhead (fixed) 20,00,000

Administrative overheads (fixed) 15,00,000

In case management shuts down the plant, fixed manufacturing overheads will reduce to 10,00,000. Fixed administrative overheads will reduce by 10,00,000. Management has to pay 10,00,000 to the laborer in case the plant shuts down. Management is certain that the business will recover after a few months and the labors problem will be over.

a. Advice the management whether the plant should shut down or continue to operate. State reasons

b. What will be your decision in case the plant was operating at 70% instead of 50% level? Show calculations.