Reference no: EM132945114

Question - Clever Company is engaged in the production and sales of a seasonal product. Its regular sales and costs data are assembled below:

Monthly sales in units (Nov - June) 200,000 lbs

Unit sales price P 8.00 per lb

Unit variable production costs P 2.00 per lb

Unit variable expenses P 0.80 per lb

Fixed overhead P 800,000

Fixed operating expenses P 500,000

In the month of July and August, the company has been experiencing a tremendous scaling down of sales to 44,000 units per month. Because of this, management is contemplating of closing down the operations in the month of July and August. This would decrease the monthly fixed overhead to P 200,000 and fixed operating expenses by 40%.

If operations are temporarily stopped in July and August, security and insurance costs, not included in the regular fixed overhead and expenses, would have to be additionally incurred at a cost of P 120,000 per month. On top of these costs, the firm is expected to incur a restart-up costs of P 300,000 before the operations commenced normally in November.

The sales price per unit will remain the same. Unit variable costs are also expected to be unchanged.

Required -

1. Determine the shut-down costs.

2. Calculate the shut-down point.

3. What is the net advantage or disadvantage of continuing the operation in the months of July and August?

4. Assuming the shut-down costs total to P 850,000 and the company decided to continue its operations in July and August, what is the opportunity cost of the company's decision?