Dammam Pharmaceutical Manufacturing Company normally produces and sells 60,000 units of product (B) each month. Product (B) is a "raw material" used as an essential part used by companies operating in the pharmaceutical industry. The selling price of product (B) is $ 44 per unit, variable costs are $ 28 per unit, the total manufacturing overhead costs is $ 300,000 per month, and the total selling costs is $ 60,000 per month. Product (B) is the only product produced by Dammam Pharmaceutical Manufacturing Company.

A sudden drop in sales of the companies in the pharmaceutical industry who purchase product (B) from Dammam Pharmaceutical Manufacturing Company. This sudden drop was due to employees' strikes in the pharmaceutical industry. This has caused Dammam Pharmaceutical Manufacturing Company’s sales of product (B) to drop temporarily to only 16,000 units per month. Dammam Pharmaceutical Manufacturing Company estimated that the employees' strike in the pharmaceutical industry would last for two months, after which time sales of product (B) should return to normal.

Due to the current low level of sales of product (B), the Chief Executive Officer of Dammam Pharmaceutical Manufacturing Company is thinking to close the factory during the two months employees' strike, which would reduce the manufacturing overhead costs by $ 90,000 per month and the fixed selling costs by 20% per month.

The Chief Financial Officer of the company could not decide, so he asked you as a Senior Manager at Dammam Pharmaceutical Manufacturing Company to recommend if the Company should close its factory for two months and why, knowing that the startup cost of the company after the two months employees' strike would be $ 16,000.

Answer rating: 100% (QA)

If we produces 16000 units in factory income will ... View the full answer