Answer:
a)No, the company should not close the plant; it should continue to operate at the reduced level of 28,000 units, because it would lead to a $199320 greater loss over the two-month period than if the company continues to operate. By closing down, the needs of these customers will not be met and they would move to another supplier
b) 9880 units
Explanation:
Contribution margin = selling price - variable cost = $30 - $19 = $11
Contribution margin lost = 14000 units / month * 2 months = 28000 units
Contribution margin lost by the plant closing = 28000 units * $11 = $308000
Fixed manufacturing overhead cost * number of months = $60,000 per month × 2 months = $120,000
Fixed selling cost = fixed selling costs total * 8% = $46000 * 0.08 = $3680
Costs avoided by closing the plant for two months = $120000 + $3680 = $123680
Net disadvantage before start up cost = Contribution margin lost by the plant closing - Costs avoided by closing the plant for two months = $308000 - $123680 = $184320
Start up cost = $15000
Closing plant disadvantage = Net disadvantage before start up cost + Start up cos = $184320 + $15000 = $199320
No, the company should not close the plant; it should continue to operate at the reduced level of 28,000 units, because it would lead to a $199320 greater loss over the two-month period than if the company continues to operate. By closing down the 28000 units produced would be lost, the needs of these customers will not be met and they would move to another supplier
b) Costs avoided by closing the plant for two months = $123680
less Start up cost = $15000
Net avoidable cost = $123680 - $15000 = $108680
Net avoidable cost/ Contribution margin per unit = $108680 / $11 = 9880 units
