Chimbell makes pickles and markets them in 500-gram tins. The full capacity of the plant is 120,000 tins per annum. The company charges $30 for each 500-gram tin. In the previous year, the company used only 50% of its capacity and the plant is presently operating at that level.
Direct material $12 per tin
Direct wages $3 per tin
Direct overheads $3 per tin
Fixed overheads $400,000
Due to poor quality of raw materials, the pickles were being spoiled and not accepted in the market. The stock is accumulating and can be disposed off at $15 per tin only. It is expected that with proper training of farmers for which $100,000 have to be spent and some R&D activity requiring further one-time expenditure of $50,000, the company can start production of pickle of acceptable quality and start marketing after a gap of 4 months. By closing all operations for 4 months fixed overheads will be reduced by $40,000. It has been further suggested that by reducing sales price by 10% and improving quality, capacity utilization can be increased to 80%.
As the manager of the company, you are required to decide whether the company should close down its operations for 4 months and go for improvement and whether any reduction in sales price is to be contemplated to achieve increased capacity utilization.
This solution involves a problem that involves decision making to continue or close operations, financial analysis, business continuity