Reference no: EM132696930

Canvass Enterprises is engaged in the bottling of a chemical compound used for car paints. Monthly production averages 200,000 bottles per month for the 3 quarters of the current year. Each bottle sells for p20 in the market. The annual fixed costs for Canvass is 7.2 millions evenly distributed on a 12-month period.

• The last quarter of the year is a critical period for Canvass. It is during this last 3 months of the year where the demand for the product is expected to go down due to seasonal variation; at this period, the demand is estimated to be an average of 40,000 bottles per month.

On the belief that the company will be saved from greater losses, management is considering to shutdown operations during the last quarter of the year. A decision to shutdown would decrease the fixed costs by 30%. However, during the shutdown period, additional costs of P140,000 is needed for security and insurance. To restart operations, the company will spend P50,000. The following data are gathered from the records of Canvass Enterprises;

Production cost per bottle:

Direct materials.................................. P 7
Direct labor....................................... 4
Variable factory overhead....................... 3
Total................................................ 14

Variable selling and administrative expense per bottle P2

Problem a: Compute the following;

1. Shutdown point in units? ____________
2. Shutdown cost? ____________________
3. What is the effect on net income if the company will shutdown