Smoluk Mining Co. is currently operating @ less than 50% of capacity. The management of company expects sales to drop below present level of 10,000 tons of ore for each month very soon. The sales price for each ton is $3 and the variable cost for each ton is $2. Fixed cost per month total $10,000.
Management is concerned that the further drop in sales volume will generate the loss and is considering the temporary suspension of operations until demand in the metals markets reebounds and prices once again rise. Over the past year, management has implemented a cost reduction program that has been successful in reducing costs to the point that suspending operations appears to be the only viable alternative. Mangement estimates that suspending operations would reduce fixed costs by $6,000 per month.
A- Why does management estimate that the fixed costs will persist at $4,000 even though the mine is temporarily closed?
B- At what sales volume will the loss be greater or less than the shutdown cost of $4,000 per month?
C- List any qualitative factors that you think management should consider in this decision, and discuss the potential impact of each factor on the decision.