Problem
Makita Company manufactures a fast-bonding glue in its Northwest plant. The company normally produces and sells 57,000 gallons of the glue each month. This glue, which is known as MJ-7, is used in the wood industry to manufacture plywood. The selling price of MJ-7 is $16 per gallon, variable costs are $6 per gallon, fixed manufacturing overhead costs in the plant total $262,400 per month, and the fixed selling costs total $320,000 per month.
Strikes in the mills that purchase the bulk of the MJ-7 glue have caused Makita Company's sales to temporarily drop to only 16,700 gallons per month. Makita Company's management estimates that the strikes will last for two months, after which sales of MJ-7 should return to normal. Due to the current low level of sales, Makita Company's management is thinking about closing down the Northwest plant during the strike.
If Makita Company does close down the Northwest plant, fixed manufacturing overhead costs can be reduced by $71,700 per month and fixed selling costs can be reduced by 6%. Start-up costs at the end of the shutdown period would total $14,000. Because Makita Company uses Lean Production methods, no inventories are on hand.
Required:
1a. Assuming that the strikes continue for two months, what is the impact on income by closing the plant.
Net income is (increased/decreased) by (amount)
1b. Would you recommend that Makita Company close the Northwest plant?
Yes
No.