Question

Superior HVAC Inc. (hereinafter “Superior”) builds heating and air conditioning units and sells them wholesale to construction contractors in Orange County California. It employs 40 employees with an average monthly payroll of $125,000. No employee earns more than $50,000 per year. Superior pays rent on their factory of $20,000 per month and utilities cost $3,000 per month. The COVID-19 has reduced sales by 75% but Superior has kept all employees on staff and is paying everyone for full time work even though there is not enough work to keep everyone busy. ISSUES: 1. Does Superior have to shut down it’s operations and make everyone stay at home due to California requirements?

Answer 1

	Shutdown point is the level of operations(sales) below which it is not justifiable to pursue operations, production.Contribution is insufficent to even to recover the Avoidable Fixed Costs.
	Level of Sales	Decision	Reason
	Below Shut Down Point	Close Down operations	Avoidable fixed costs are not fully recovered
	At Shut Down Point	Continue Operations	Avoidable fixed costs are just recovered
	Above Shut Down point	Continue Operations	Avoidable fixed costs are fully recovered
	40 employees with average monthly payroll = $125000
	Rent=$20000
	Utilities Cost=$3000
	Covid reduction in sales by 75%
	shut down its operations and stay at home
	Shut down point= Avoidable Fixed costs                                   Contribution per unit
	*Avoidable Fixed Cost = Total Fixed Cost- (Minimum Fixed Cost- Shut down Costs)
	In the absence of sales figures it is assumed that question can be answered on assumption
1	Two possibilities can be considered i.e to treat employees salary as fixed or variable. Fixed if we continue to pay during the period of lockdown and variable if not paid
2	Rent is a fixed cost
3	Utility Cost is Variable Cost
Salary is fixed	Avoidable Fixed Costs= 145000-20000= 125000
	If dividing the said sum by contribution per unit exceeds the current opeartions level the operations is to be continued
Salary is variable	Avoidable Fixed Costs=20000
	If dividing the said sum by contribution per unit exceeds the current opeartions level the operations is to be continued