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( Note: This type of decision is similar to dropping a product IIne. ) Nicholas Company manufactures a fast - bonding glue, normally ( Note:
Note: This type of decision is similar to dropping a product IIne. Nicholas Company manufactures a fastbonding glue, normallyNote: This type of decision is similar to dropping a product IIne. Nicholas Company manufactures a fastbonding glue, normally
producing and selling litres of the glue each month. This glue, which is known as MJ is used in the wood industry to
manufacture plywood. The selling price of is $ per litre, varlable costs are $ per litre, fixed manufacturing overhead costs in
the plant total $ per month, and the fixed selling costs total $ per month.
Strikes in the mills that purchase the bulk of the MJ glue have caused Nicholas Company's sales to temporarlly drop to only
IItres per month. Nicholas Company's management estimates that the strikes will last for two months, after which sales of MJ 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 $ per month and fixed
selling costs can be reduced by Startup costs at the end of the shutdown period would total $ Since Nicholas Company
uses lean production methods, no inventorles are on hand.
Requirec:
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
b Would you recommend that Nicholas Company close its own plant?
No
Yes
At what level of sales In IItres for the twomonth period should Nicholas Company be indifferent between closing the plant and
keeping it open? Hint: This is a type of breakeven analysis, except that the fixedcost portion of your breakeven computation should
Include only those fixed costs that are relevant Ie avoidable over the twomonth period.
producing and selling litres of the glue each month. This glue, which is known as MJ is used in the wood industry to
manufacture plywood. The selling price of is $ per litre, varlable costs are $ per litre, fixed manufacturing overhead costs in
the plant total $ per month, and the fixed selling costs total $ per month.
Strikes in the mills that purchase the bulk of the MJ glue have caused Nicholas Company's sales to temporarlly drop to only
IItres per month. Nicholas Company's management estimates that the strikes will last for two months, after which sales of MJ 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 $ per month and fixed
selling costs can be reduced by Startup costs at the end of the shutdown period would total $ Since Nicholas Company
uses lean production methods, no inventorles are on hand.
Requirec:
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
b Would you recommend that Nicholas Company close its own plant?
No
Yes
At what level of sales In IItres for the twomonth period should Nicholas Company be indifferent between closing the plant and
keeping it open? Hint: This is a type of breakeven analysis, except that the fixedcost portion of your breakeven computation should
Include only those fixed costs that are relevant Ie avoidable over the twomonth period.
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