Question

    Gamma Textiles Ltd. manufactures a single product with

    the following cost structure: • Selling Price per unit: ₹500 • Variable Cost per unit: ₹300 • Fixed Costs per month: ₹8 lakh • Normal monthly sales: 5,000 units Due to a market recession, demand is expected to fall to 1,500 units/month. The company has the option to shut down temporarily, in which case fixed costs would reduce to ₹2.5 lakh/month (as unavoidable fixed costs). Based on marginal costing principles, what should the company do?
    A Shut down, as operating at reduced volume causes a loss Correct Answer Incorrect Answer
    B Continue operations to avoid permanent loss of market Correct Answer Incorrect Answer
    C Continue operations, as contribution exceeds avoidable fixed costs Correct Answer Incorrect Answer
    D Shut down, since sales are below breakeven Correct Answer Incorrect Answer

    Solution

    Comparison of Two Scenarios: ✅ If the firm continues operating: • Contribution = ₹3,00,000 • Fixed cost = ₹8,00,000 • Net loss = ₹(5,00,000) ✅ If the firm shuts down: • Contribution = ₹0 • Fixed cost (unavoidable) = ₹2,50,000 • Net loss = ₹(2,50,000) Since loss is lower in shut-down mode (₹2.5L < ₹5L), the firm should still shut down temporarily.

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