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Temporarily Shut Down Operations or Continue

A corporation is considering temporarily shutting down operations in August and September due to slow business. The accounting department provided operating data for consideration. If the company shuts down, certain costs will be incurred including security, restart costs, and reduced but not eliminated fixed overhead and expenses. The shutdown point was calculated to be 4,500 units based on contribution margin. Continuing operations would result in a net advantage of ₱440,000 compared to shutting down.

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Aira Jaimee Gonzales
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1K views

Temporarily Shut Down Operations or Continue

A corporation is considering temporarily shutting down operations in August and September due to slow business. The accounting department provided operating data for consideration. If the company shuts down, certain costs will be incurred including security, restart costs, and reduced but not eliminated fixed overhead and expenses. The shutdown point was calculated to be 4,500 units based on contribution margin. Continuing operations would result in a net advantage of ₱440,000 compared to shutting down.

Uploaded by

Aira Jaimee Gonzales
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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1.

A corporation has been experiencing a slowdown in business activities in August and September
and is considering temporarily shutting down its operations during those months. The accounting
department has provided the following normal operating data for consideration: unit sales price, P 150;
unit variable production cost, P 60; unit variable marketing cost, P10; monthly fixed overhead, P 500,000,
monthly fixed expenses, P200,000; regular sales in units, 10,000 per month; estimated sales in units in
August and September, 5,000 per month.

If the company shuts down its operations, the following costs are expected to be incurred: security and
safety, P 200,000 per month; restart-up costs, P 100,000 per set-up, regular fixed overhead, 40% of total
will remain; regular fixed expenses, reduced by 30%.

Required: Compute the total shutdown costs, shutdown point in two months, and the advisable alternative
(continuing or discontinuing the operations) with its advantage amount.

m
er as
Unavoidable fixed overhead (P500,000 x 40% x 2) P 400,000

co
eH w
Unavoidable fixed expenses (P200,000 x 70% x 2) 140,000
Security and safety (P200,000 x 2) 400,000

o.
Re-start up costs 100,000
rs e
ou urc
Total shut down costs P1,040,000

Fixed costs and expenses [(P500,000 + P200,000) x 2 months] P1,400,000


o

Shut-down costs 1,040,000


aC s

Unit contribution margin (P150 – P60 – P10) 80


vi y re

Computation of SDP

Shut-down point = (Fixed costs and expenses – Shut-down costs) / UCM


ed d

= [(P1,400,000 – P1,040,000} / P80]


ar stu

Shut-down point = 4,500 units

To prove, we have:
sh is

Contribution margin (4,500 x P80) P 360,000


- Fixed costs and expenses 1,400,000
Th

Loss from continuing operations ( 1,040,000)


- Shut down costs 1,040,000
No difference P0

Contribution margin (5,000 units x 2 months x P80) P 800,000


- Fixed costs and expenses 1,400,000
Loss from continuing operations ( 600,000)
- Shut down costs 1,040,000
Net advantage of continuing the operations P 440,000

Loss of continuing operations at shut down point P1,040,000


Loss of continuing operations 600,000

https://www.coursehero.com/file/58140398/TEMPORARILY-SHUT-DOWN-OPERATIONS-OR-CONTINUEdocx/
Net advantage of continuing the operations P 440,000

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
sh is
Th

https://www.coursehero.com/file/58140398/TEMPORARILY-SHUT-DOWN-OPERATIONS-OR-CONTINUEdocx/

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