Reference no: EM132590953

Peeta Company is in the fish canning industry. Its regular monthly production from January to October averages 100 tons of tuna fish that will produce 1,000,000 cans of canned tuna that can be sold at 10 per can in the market. Its annual fixed costs amounts to 18,000,000 that are evenly allocated on a twelve-month period. During the months of November and December, the supply of tuna fish goes down to an average of 20 tons monthly or 200,000 cans of canned tuna monthly.

Management is considering shutting down operations during the months of November and December on the belief that the company will be saved from greater losses during these months. If management decides to shut down operations, additional costs of 50,000 monthly will be incurred for security and insurance of the plant. The company will also spend additional 60,000 in re-starting operations in January.

The following data are gathered from the records of Peeta Company:

Raw materials & ingredients 5.20

Direct labor 0.55

Variable overhead 0.25

Total Variable cost per can 6.00

Variable selling and administrative expenses averages 0.10 per can. It is assumed that the market can absorb all canned tuna produced. Shutdown operations will reduce fixed costs during November and December by 40%.

REQUIRED:

Question 1. Compute the shutdown costs.

Question 2. Determine the shutdown point.

Question 3. Evaluate the result of continued operations and compare with shutdown of operations.