Temporary closure of factory or department, Managerial Accounting

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TEMPORARY CLOSURE OF FACTORY OR DEPARTMENT

Here there is a similar situation to that of discontinuance of a product such as Model N40. A factory which is expected to earn some contribution should continue in operation rather than be shut down. However, if the factory is part of a group, the decision is quite different when the output from the closed factory is not lost but transferred to another factory in the group with spare capacity. For example, a temporary fall in the sales volume of a company's products may result in either of two factories being capable of satisfying the expected demand. In this situation the company can optimize its profits by concentrating production in that factory which has the lowest marginal costs. In reaching a decision, consideration should be given to predictable cost changes generated by the decision: such as additional distribution costs, care and maintenance of the closed premises, restarting costs, and any fixed cost savings such as salaries in the closed factory.


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