Question

Gamma Textiles Ltd. manufactures a single product with

Q: Answer-Gamma Textiles Ltd. manufactures a single product with the following cost structure: • Selling Price...

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.

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

B Continue operations to avoid permanent loss of market

C Continue operations, as contribution exceeds avoidable fixed costs

D Shut down, since sales are below breakeven

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Gamma Textiles Ltd. manufactures a single product with

Solution