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

producing and selling $72,000$ litres of the glue each month. This glue, which is known as M$.$J$-7,$ is used in the wood industry to

manufacture plywood. The selling price of $MJ-7$ is $$55$ per litre, variable costs are $$33$ per litre, fixed manufacturing overhead costs

in the plant total $$414,000$ per month, and the fixed selling costs total $$554,400$ 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

$18,000$ 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 $$108,000$ per month and

fixed selling costs can be reduced by $10\%.$ Start$-$up costs at the end of the shutdown period would total $$7,880.$ 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?

Yes

No

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.$)$