Question 2Nicholas Company manufactures a fast-bonding glue, normally producing and selling 44,000litres of the glue each month. This glue, which is known as MJ-7, is used in the wood industryto manufacture plywood. The selling price of MJ-7 is$30 per litre, variable costs are $18 perlitre, fixed manufacturing overhead costs in the plant total $253,000 per month, and the fixedselling costs total $338,000 per month.Strikes in the mills that purchase the bulk of the MJ-7 glue have caused Nicholas Company’ssales to temporarily drop to only 11,000 litres per month. Nicholas Company’s managementestimates that the strikes will last for two months, after which sales of MJ-7 should return tonormal. Due to the current low level of sales, NicholasCompany’s management is thinkingaboutclosing down the plant during the strike. If Nicholas Company does close down the plant, fixed manufacturing overhead costs can bereduced by $66,000 per month and fixed selling costs can be reduced by 10%. Start-up costs atthe end of the shutdown period would total $7,760. Since Nicholas Company uses leanproduction methods, no inventories are on hand.Required:1.Assuming that the strikes continue for two months, compute the increase ordecrease in income fromclosing the plant.Would you recommend that NicholasCompany close its own plant?2.At what level of sales (in litres) for the two-month period should Nicholas Companybe indifferent between closing the plant and keeping it open? (Note: This is a typeofbreak-even analysis, except that the fixed-cost portion of your break-evencomputation should include only those fixed costs that are relevant over the two-month period).
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