McDougal Company

McDougal Company manufactures brake pads at its Brampton plant. The company normally produces and sells 40,000 sets of brake pads each month. The selling price for each set of brake pads is $35, and variable costs are $21. Fixed manufacturing overhead costs in the plant total $230,000 per month, and the fixed selling costs total $310,000 per month. A strike at the plant of its largest customer has caused McDougal Company’s sales to drop to only 11,000 sets per month. McDougal Company’s management estimates that the strike will last for two months, after which, sales of brake pads should return to normal. Due to the current low level of sales, McDougal management is considering a temporary closure of the Brampton plant during the strike. If McDougal Company does close down the Brampton plant, fixed manufacturing overhead costs can be reduced by $60,000 per month and fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total $14,000. Because McDougal uses Just-in-Time methods, no inventories are on hand.

Required:
1. Assuming that the strike continues for two months. Based on financial considerations alone, would you recommend that McDougal Company close the Brampton plant? Identify all relevant considerations in making this decision and show computations to support your answer.
2. At what level of sales for the two-month period should McDougal Company be indifferent between closing the plant or keeping it open? (Hint: This is a type of breakeven analysis problem, except that the fixed cost portion of your computation should include only those fixed costs that are relevant over the two –month period).