Plant Shut Down Decisions

Solution: In this section, we are described Plant shut down decisions. Let’s check it out.

Plant Shut Down Decisions (फैक्ट्री बंदी निर्णय) –

This kind of decision is being taken when the nature of business is seasonal, cut-throat competition and other unfavorable conditions of the market are there. While taking the decision of ‘Plant Shut Down’ of the going concern the behavior of costs should be considered. When one shuts down his plant, there are some avoidable, traceable, or escapable fixed costs such as salaries of temporary workers and salary of a salesman, which can be stopped by this decision.

इस प्रकार का निर्णय तब किया जाता है जब व्यापार की अनुकुल चल रहा हो, या प्रतिस्पर्धा से अलग करने के लिये या अन्य प्रतिकूल बाजार की स्थितियां होती हैं। यह कंपनी को  “बंद” करने का निर्णय,  लागत पर विचार करने के लिये किया जाता है। जब कोई अपने संयंत्र को बंद करता है, वहाँ कुछ परिहार्य निर्धारित लागत, ट्रैक करने योग्य हैं या अस्थायी कर्मचारियों के वेतन के रूप में, बचा जा सकता है और विक्रेता है, जो इस निर्णय से रोका जा सकता है भुगतान करते हैं।

Some unavoidable or un-escapable cost is

• depreciation on fixed assets,
• rent of office and factory,
• insurance,
• interest and salaries of permanent staff.

These cannot be stopped by shutting down the plant temporarily. Some additional costs of Shut Down or Reopening Costs should be considered as part of the unavoidable costs.

Normal decisions are for maximizing the profits, but the Shut Down decision is for reducing the loss as it always considers the savings under loss. Calculation of net avoidable costs can be made through the following formula:

Net Avoidable FC = Total FC – (Unavoidable FC + Re-opening Costs)

If the loss by taking the decision of ‘Shut Down’ is less than the continuity of the business then the decision of ‘Shut Down’ may be considered as favorable in short term. Some aspects other than costs should also be considered, such as the utility of the goods by the consumers, benefits of the employees, obsolescence of machinery, goodwill of the concern, objection by the labor unions, and government interference. ‘Shut Down Point’ can be calculated by marginal cost method by the following formulae:

Shut Down Point (in Units) = Net Avoidable Fixed Cost
Contribution per Unit
Shut Down Point (in Value) = Net Avoidable Fixed Cost
P/V Ratio

There is a great difference between the ‘Shut Down’ of a business and stop the production of one type of product. If the production of any type of product is stopped then the fixed cost of that product can be allocated to the remaining products; but when the plant is being ‘Shut Down’, the remaining fixed costs are the loss for the concern.

IGNOU MCOM QUESTION PAPER DECEMBER 2020

IGNOU MCOM QUESTION PAPER JUNE 2020