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. Thecompany produces and sells 40,000 gallons of the glue each month. Thisglue, which is known as KK-8, is used in the wood industry to manufactureplywood. The selling price of KK-8 is P35 per gallon, variable costs are P21per gallon, fixed manufacturing overhead costs in the plant total P230,000per 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 causedKristin Company's sales to temporarily drop to only 11,000 gallons permonth. Kristin Company's management estimates that strikes will last fortwo months, after which sales of KK-8 should return to normal. Due to thecurrent low level of sales, Kristin Company's management is thinking aboutclosing down the Laguna plant during the strike.If Kristin Company does close down the Laguna plant, fixed manufacturingoverhead costs can be reduced by P60,000 per month and fixed selling costscan be reduced by 10%. Start-up costs at the end of the shutdown periodwould 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 yourecommend 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 shouldKristin Company be indifferent between closing the plant or keeping itopen? Show computations. (Hint: This is a type of break-even analysis,except that the fixed cost portion of your break-even computation shouldinclude only those fixed costs that are relevant [i.e., avoidable] over thetwo-month period.)

Shutting down or continuing to operate is a decision that is taken by management after considering…

Answered: 1. Assuming that the strikes continue…

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.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 5P

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