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  • 07 01 12 2022 Question 5

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    Pragathi Sundar
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    The document discusses whether a company should shut down production or continue operating at a lower capacity. It considers the fixed costs of shutting down production, the minimum maintenance costs during a shutdown, and the costs of reopening. It calculates that the avoidable fixed costs from shutting down would be Rs. 11,25,000. This level of production could be achieved at a 6.5% lower capacity while still covering fixed costs. Continuing production at this lower level would result in a smaller loss than shutting down after factoring in all shutdown and startup costs. Therefore, the summary is that the company should continue operating at a lower production level to avoid greater losses from completely shutting down.

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    The document discusses whether a company should shut down production or continue operating at a lower capacity. It considers the fixed costs of shutting down production, the minimum maintenance costs during a shutdown, and the costs of reopening. It calculates that the avoidable fixed costs from shutting down would be Rs. 11,25,000. This level of production could be achieved at a 6.5% lower capacity while still covering fixed costs. Continuing production at this lower level would result in a smaller loss than shutting down after factoring in all shutdown and startup costs. Therefore, the summary is that the company should continue operating at a lower production level to avoid greater losses from completely shutting down.

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    16 views11 pages

    07 01 12 2022 Question 5

    Uploaded by

    Pragathi Sundar
    The document discusses whether a company should shut down production or continue operating at a lower capacity. It considers the fixed costs of shutting down production, the minimum maintenance costs during a shutdown, and the costs of reopening. It calculates that the avoidable fixed costs from shutting down would be Rs. 11,25,000. This level of production could be achieved at a 6.5% lower capacity while still covering fixed costs. Continuing production at this lower level would result in a smaller loss than shutting down after factoring in all shutdown and startup costs. Therefore, the summary is that the company should continue operating at a lower production level to avoid greater losses from completely shutting down.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as xlsx, pdf, or txt
    of 11

    Question 5

    Is Direct labour wages is Variable or Fixed Cost?


    IF Wages are paid for production, it will be variab
    IF wages are paid to retain the workers, it will be f
    Skilled labour means a worker who works w

    What is the normal capacity ? 2,00,000 Units


    Total Fixed Cost :: Planned (Normal) Capacity X F
    2,00,000 X (Rs. 7 + Rs. 30)

    During the period of Shut Down, Minimum Fixed Cost


    1) Rent
    2) Lubrication of machine
    3) Cleaning operation
    4) Interest on Loan
    5) Inventory Holding Cost
    6) Minimum Power charges

    For Shutting Down Cost - Rs. 50,000


    1) Disassembling of the Machine
    2) Casual workers should be paid one
    3) Scrapping down or throwing out th
    4) Compensation Amount as per agree
    5) Legal compensation, Govt penalty t

    Reopening after shut down - Rs. 1,00,000


    1) Assembling of the Machine
    2) Trial Run Cost
    3) Recruitment of Casual workers
    4) Consumable consumption will be h

    Should we Shut Down

    Shut Down Cost


    Minimum Maintenance fixed Cost
    Reopening Cost
    (Loss)

    Loss due to Shut Down < Loss on Continuin


    Loss due to Shut Down > Loss on Continuin

    Units to be produced for continuance = Avoidab

    How to minimise the fixed Cost


    1) From minimum 2 employees - 1 Employee
    2) Reducing Shift Size
    3) New technology - Manual to Automation
    4) Reducing wages or No Incremental
    5) Two line of production - One line at low cost - D
    Another line with hi
    6) Sale of Unutilised Assets
    7) Workers Welfare Expenses
    8) Alternate usage of Asset
    9) Work From Home
    10) Outsourcing of Non Value added activities

    Should we Shut Down


    Minimum Fixed Cost
    Retainment Salary 6,000,000
    Shut Down Cost 50,000
    Reopening Cost 100,000
    Fixed Manf OH 125,000
    6,275,000

    Avoidable Fixed Cost on Shutting Down = 74,00,0


    Units to be produced = 11,25,000

    Contribution Sale Price


    Less:
    DM
    VOH
    V Selling Cost

    Calculating Fixed Cost Per Unit == Total Fixed Cost incu

    On producing 13,082 = Contribution =


    Less: Fixed Cost on Continuance
    On producing 11,000 = Contribution =
    Less: Fixed Cost on Continuance
    d Cost?
    t will be variable cost
    kers, it will be fixed cost
    r who works without any support

    00 Units
    l) Capacity X Fixed Cost per Unit
    Rs. 7 + Rs. 30) per Unit = Rs. 74,00,000

    um Fixed Cost will be Rs. 1,25,000

    2) Retaining Employees
    Repayment of Advance Mon

    Machine
    ld be paid one time settlement
    hrowing out the Good Material
    unt as per agreement
    Govt penalty to close down

    achine
    al workers
    ption will be higher

    Should We Continue to Prod

    Contribution for produced u


    fixed Cost Less: Same existing fixed Co
    Less: New low level of fixed
    Profit / (Loss)

    s on Continuing = Shut Down


    s on Continuing = Continue the Plant

    nce = Avoidable Fixed Cost during Shut Down / Contribution per

    Employee

    omation

    e at low cost - Domestic Market


    her line with high Cost - Export Market
    d activities

    Should We Continue to Prod

    Retainment Salary
    Shut Down Cost
    Reopening Cost
    Fixed Manu OH

    Down = 74,00,000 - 62,75,000 = 11,25,000


    ced = 11,25,000 / 86 = 13,081 6.5% of Normal C

    200 180

    65
    33
    16
    86

    Fixed Cost incurred / Normal Capacity

    Contribution = 11,25,000 1,125,052


    ntinuance 7,400,000
    (6,274,948)
    Contribution = 9,46,000 946000
    ntinuance 7,400,000
    (6,454,000)
    of Advance Money -
    Continue to Produce at lower level

    n for produced units


    existing fixed Cost
    ow level of fixed cost
    Profit / (Loss)

    ontribution per Unit


    Continue to Produce at lower level

    Salary 6,000,000
    -
    -
    1,400,000
    7,400,000

    6.5% of Normal Capacity

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