320 Chapter 11
Problem 9 (Shutting Down or Continuing to Operate a Plant)
(Note: This type of decision is similar to dropping a product line.)
Kristin Company manufactures a fast-bonding glue in its Laguna plant The
company produces and sells 40,000 gallons of the glue each month. Th
glue, which is known as KK-8, is used in the wood industry to manufach
plywood. The selling price of KK-8 is P35 per gallon, variable costs are P)
per gallon, fixed manufacturing overhead costs in the plant total P230.00
per month, and the fixed selling costs total P310,000 per month.
Strikes in the mills that purchase the bulk of the KK-8 glue have caused
Kristin Company's sales to temporarily drop to only 1,000 gallons per
month. Kristin Company's management estimates that strikes will last for
two months, after which sales of KK-8 should return to normal. Due to the
current low level of sales, Kristin Company's management is thinking about
closing down the Laguna plant during the strike.
If Kristin Company does close down the Laguna plant, fixed manufacturing
overhead costs can be reduced by P60,000 per month and fixed selling costs
can be reduced by 10%. Start-up costs at the end of the shutdown period
would total P14,000. Since Kristin Company uses Lean Production methods,
no inventories are on hand.
Required:
1. Assuming that the strikes continue for two months, would you
recommend that Kristin Company close the Laguna plant? Explain.
Show computations to support your answer.
2. At what level of sales (in gallons) for the two-month period shoulu
Kristin Company be indifferent between closing the plant or keeping.
open? Show computations. (Hint: This is a type of break-even analy
except that the fixed cost portion of your break-even computation S
include only those fixed costs that are relevant [i.e., avoidablej ove the
two-month period.)