SHUTDOWN OR CONTINUE OPERATIONS DANCING ELF INC. produces white glue (a wood glue) that is used by furniture manufacturers. The company normally produces and sells 10,000 gallons of the glue each month. White Glue is sold for P280 per gallon, variable costs is P168 per gallon, fixed factory overhead cost totals P460,000 per month, and the fixed selling costs totals P620,000 per month. Labor strikes in the furniture manufacturers that buy the bulk of White Glue have caused the monthly sales of DANCING ELF to temporarily decrease to only 30 % of its normal monthly volume. DANCING ELF's management expects that the strikes will last for about 2 months, after which, sales of White Glue should return to normal. However, due to the dramatic drop in the sales level, DANCING ELF's management is considering to close down its plant during the two-month pericd that the strikes are 6. on If DANCING ELF INC. will temporarily shut down its operations, it is expected that the fixed factory overhead costs can be reduced to P340,000 per month and that the fixed selling costs can be reduced by P62,000 per month. Start-up costs at the end of the shut-down period would total P56,000. DANCING ELF uses the JIT system, so no inventories are on hand. REQUIREMENTS: (a) At the sales level of cnly 30% of the normal volume, should the company continue operating or shutdown temporarily for two months? (b) Compute for the shut-down point
SHUTDOWN OR CONTINUE OPERATIONS DANCING ELF INC. produces white glue (a wood glue) that is used by furniture manufacturers. The company normally produces and sells 10,000 gallons of the glue each month. White Glue is sold for P280 per gallon, variable costs is P168 per gallon, fixed factory overhead cost totals P460,000 per month, and the fixed selling costs totals P620,000 per month. Labor strikes in the furniture manufacturers that buy the bulk of White Glue have caused the monthly sales of DANCING ELF to temporarily decrease to only 30 % of its normal monthly volume. DANCING ELF's management expects that the strikes will last for about 2 months, after which, sales of White Glue should return to normal. However, due to the dramatic drop in the sales level, DANCING ELF's management is considering to close down its plant during the two-month pericd that the strikes are 6. on If DANCING ELF INC. will temporarily shut down its operations, it is expected that the fixed factory overhead costs can be reduced to P340,000 per month and that the fixed selling costs can be reduced by P62,000 per month. Start-up costs at the end of the shut-down period would total P56,000. DANCING ELF uses the JIT system, so no inventories are on hand. REQUIREMENTS: (a) At the sales level of cnly 30% of the normal volume, should the company continue operating or shutdown temporarily for two months? (b) Compute for the shut-down point
Chapter4: Preparing And Using Financial Statements
Section: Chapter Questions
Problem 2EP
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Transcribed Image Text:SHUTDOWN OR CONTINUE OPERATIONS
DANCING ELF INC. produces white glue (a wood glue) that is used by furniture manufacturers. The
company normally produces and sells 10,000 gallons of the glue each month. White Glue is sold for
P280 per gallon, variable costs is P168 per gallon, fixed factory overhead cost totals P460,000 per
month, and the fixed selling costs totals P620,000 per month.
Labor strikes in the furniture manufacturers that buy the bulk of White Glue have caused the monthly
sales of DANCING ELF to temporarily decrease to only 30 % of its normal monthly volume. DANCING
ELF's management expects that the strikes will last for about 2 months, after which, sales of White
Glue should return to normal. However, due to the dramatic drop in the sales level, DANCING ELF's
management is considering to close down its plant during the two-month period that the strikes are
on.
If DANCING ELF INC. will temporarily shut down its operations, it is expected that the fixed factory
overhead costs can be reduced to P340,000 per month and that the fixed selling costs can be reduced
by P62,000 per month. Start-up costs at the end of the shut-down period would total P56,000.
DANCING ELF uses the JIT system, so no inventories are on hand.
REQUIREMENTS:
(a)
6.
At the sales level of anly 30 % of the normal volume, should the company continue operating or
shutdown temporarily for two months?
(b)
Compute for the shut-down point
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