$($Note: This type of decision is similar to dropping a product line.$)$ Nicholas Company manufactures a fast$-$bonding glue, normally

producing and selling $54,000$ 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 $$45$ per litre, variable costs are $$27$ per litre, fixed manufacturing overhead costs in

the plant total $$310,500$ per month, and the fixed selling costs total $$415,800$ per month.

points awarded

Strikes in the mills that purchase the bulk of the MJ$-7$ glue have caused Nicholas Company's sales to temporarily drop to only $13,500$

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 $$81,000$ per month and fixed

selling costs can be reduced by $10\%.$ Start$-$up costs at the end of the shutdown period would total $$11,160.$ 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?

No

Yes

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.$)$

$13,000$ Iitres in two months