Hallas Company manufactures a fast-bonding gum in its Northwest works. The company usually produces and sells 40,000 gallons of the glue each month. This gum, which is known as MJ-7, is used in the wood industry to fabricate plyboard. The merchandising monetary value of MJ-7 is $ 35 per gallon, variable costs are $ 21 per gallon, fixed fabrication operating expense costs in the works entire $ 230,000 per month, and the fixed merchandising costs entire $ 310,000 per month. Strikes in the Millss that purchase the majority of the MJ-7 gum have caused Hallas Company’s gross revenues to temporarily drop to merely 11,000 gallons per month. Hallas Company’s direction estimations that the work stoppages will last for two months, after which gross revenues of MJ-7 should return to normal.

Due to the current low degree of gross revenues, Hallas Company’s direction is believing about shuting down the Northwest works during the work stoppage. If Hallas Company does near down the Northwest works, fixed fabrication operating expense costs can be reduced by $ 60,000 per month and fixed merchandising costs can be reduced by 10 % . Start-up costs at the terminal of the shutdown period would number $ 14,000. Since Hallas Company uses Lean Production methods, no stock lists are on manus.

Required:

1. Assuming that the work stoppages continue for two months, would you urge that Hallas Company close the Northwest works? Explain. Show calculations to back up your reply. 2. At what degree of gross revenues ( in gallons ) for the two-month period should Hallas Company be apathetic between shuting the works or maintaining it unfastened? Show calculations. ( Hint: This is a type of break-even analysis, except that the fixed cost part of your break-even calculation should include merely those fixed costs that are relevant [ i.e. , evitable ] over the two-month period. )

No, the company should non shut the works ; it should go on to run at the decreased degree of 11,000 gallons produced and sold each month. Shutting will ensue in a $ 140,000 greater loss over the two-month period than if the company continues to run. Extra factors are the possible loss of good will among the clients who need the 11,000 gallons of MJ-7 each month and the inauspicious consequence on employee morale. By shuting down, the demands of clients will non be met ( no stock lists are on manus ) , and their concern may be for good lost to another provider.