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Shutdown Exercises

Tree Top Co. is considering whether to shutdown its operations. It currently sells 2,000 units per quarter at $40 each, with variable costs of $25 per unit and fixed costs of $100,000. If it shuts down, fixed costs will decrease by 40% but it will incur shutdown costs of 2.5% of current fixed costs. The shutdown point is 1,500 units - if sales fall below this, it should shutdown. The incremental benefit of shutting down is $5,000 per quarter. Fishy Inc. is considering shutting down its plant for one quarter due to inflation. It currently sells 500 units per quarter at $80 each, with variable costs of $48 per unit and fixed

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Daphne
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19 views

Shutdown Exercises

Tree Top Co. is considering whether to shutdown its operations. It currently sells 2,000 units per quarter at $40 each, with variable costs of $25 per unit and fixed costs of $100,000. If it shuts down, fixed costs will decrease by 40% but it will incur shutdown costs of 2.5% of current fixed costs. The shutdown point is 1,500 units - if sales fall below this, it should shutdown. The incremental benefit of shutting down is $5,000 per quarter. Fishy Inc. is considering shutting down its plant for one quarter due to inflation. It currently sells 500 units per quarter at $80 each, with variable costs of $48 per unit and fixed

Uploaded by

Daphne
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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[1] SHUTDOWN POINT

Instruction: Do as directed
[a] Compute the shutdown point ____________________________________
[b] Will the firm shutdown or not? _________________
[c] What is the incremental income to support the decision in b? P________
Tree Top Co. is contemplating whether to shutdown or not. Its present sales is 2,000 units, sold at P40 each. If
it will shut down, the firm's fixed costs of P100,000 will decrease by 40%. However, the firm will incur shutdown
costs equal to 2.5% of the present fixed costs. The variable costs are P25 per unit.

[2]

SHUTDOWN

Required:
a) Compute the shutdown point per quarter __________________________
b) Should the firm shutdown its plant? ________________
c) What is the quarterly incremental benefit to support the decision in b? P__________
Due to the effect of the global crisis due to inflation, the Fishy Inc. decided
to shutdown its plant for one quarter. The shutdown would reduce 60% of fixed costs and expenses but additional
costs to maintain the building would be P42,000 aside from re-starting costs of P10,000. The following information
were also gathered:
Fixed costs and expenses per quarter
Unit selling price
Variable costs and expenses per unit
Current sales volume per quarter

P300,000
80
48
500 units

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