Test III PROBLEM SOLVING (CASE ANALYSIS) (2 points each) 20 points

B.

Kristine Company manufactures a fast-bonding glue in its Cavite plant. The company produces and sells 40,000 gallons of the glue each month. This glue, which is known as KK-5, is used in the wood industry to manufacture plywood. The selling price of KK-5 is P35 per gallon, variable costs are P21 per gallon, fixed manufacturing overhead costs in the plant total P230,000 per month, and the fixed selling costs total P310,000 per month.

Strikes in the mills that purchase the bulk of the KK-5 glue have caused Kristine company's sales to temporarily drop to only 11,000 gallons per month. Kristine Company's management estimates that the strikes will last for two months, after which sales of KK-5 should return to normal. Due to the current low level of sales, Kristine company's management is thinking of about closing down the Cavite plant during the strike.

If Kristine company does close down the Cavite plant, fixed manufacturing overhead costs can be reduced by P60,000 per month and fixed selling costs can be reduced by 10%. Start-up cost at the end of the shutdown period would total P 14,000. Since Kristine company uses Lean Production methods, no inventories are on hand.

REQUIRED: Compute for the following:

1. What are the alternatives of Kristine Company in this situation?
2. The shutdown costs based on the above information
3. The advantage or disadvantage of whether to shutdown operation or continue operations