Question: Smoluk Mining Company currently is operating at less than 50

Smoluk Mining Company currently is operating at less than 50 percent of capacity. The management of the company expects sales to drop below the present level of 10,000 tons of ore per month very soon. The sales price per ton is $3 and the variable cost per ton is $2. Fixed costs per month total $10,000.
Management is concerned that a further drop in sales volume will generate a loss and, accordingly, is considering the temporary suspension of operations until demand in the metals markets rebounds and prices once again rise. Over the past year, management has implemented a cost-reduction program that has been successful in reducing costs to the point that suspending operations appears to be the only viable alternative. Management estimates that suspending operations would reduce fixed costs by $6,000 per month.

A. Why does management estimate that the fixed costs will persist at $4,000 even though the mine is temporarily closed?
B. At what sales volume will the loss be greater or less than the shutdown cost of $4,000 per month?
C. List any qualitative factors that you think management should consider in this decision, and discuss the potential impact of each factor on the decision.

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  • CreatedMarch 11, 2015
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