Sohar Manufacturing Company normally produces and sells 30,000 units of product (X) each month. Product (X) is a small electrical relay used as a component part in the automotive industry. The selling price is $22 per unit, variable costs are $14 per unit, fixed manufacturing overhead costs total
Sohar Manufacturing Company normally produces and sells 30,000 units of
product (X) each month. Product (X) is a small electrical relay used as a
component part in the automotive industry. The selling price is $22 per unit,
variable costs are $14 per unit, fixed
$150,000 per month, and fixed selling costs total $30,000 per month.
Employment-contract strikes in the companies that purchase the bulk of the
product (X) units have caused Sohar Company’s sales to temporarily drop to
only 8,000 units per month. Sohar Company estimates that the strikes will last
for two months, after which time sales of product (X) should return to normal.
Due to the current low level of sales, Sohar Company is thinking about closing
down its own plant during the strike, which would reduce its fixed manufacturing
overhead costs by $45,000 per month and its fixed selling costs by 10%. Startup costs at the end of the shutdown period would total $8,000.
Required:
As a Senior Manager at Sohar Company, would you recommend that the
Company closes its own plant for two months? Justify your
recommendation.
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