Problem 10-20A Shutting Down or Continuing to Operate a Plant [LO2]
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Hallas Company manufactures a fast-bonding glue in its Northwest plant. The company normally produces and sells 42,000 gallons 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 $31 per gallon, variable costs are $20 per gallon, fixed manufacturing overhead costs in the plant total $223,000 per month, and the fixed selling costs total $320,000 per month.
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Strikes in the mills that purchase the bulk of the MJ-7 glue have caused Hallas Company's sales to temporarily drop to only 14,000 gallons per month. Hallas 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, Hallas Company's management is thinking about closing down the Northwest plant during the strike.
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If Hallas Company does close down the Northwest plant, fixed manufacturing overhead costs can be reduced by $60,000 per month and fixed selling costs can be reduced by 9%. Start-up costs at the end of the shutdown period would total $15,000. Because Hallas Company uses Lean Production methods, no inventories are on hand.
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| 1a. |
Assuming that the strikes continue for two months, what is the impact on income by closing the plant.(Input the amount as a positive value.) |
| Net income is (Click to select)increaseddecreased by |
$ in two months |
| 1b. |
Would you recommend that Hallas Company close the Northwest plant? |
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| 2. |
At what level of sales (in gallons) for the two-month period should Hallas Company be indifferent between closing the plant or keeping it open? (Round your answer to the nearest whole number.) |
| Level of sales |
gallons in two months |