Waldo Mining Company Currently Is Operating at Less Than 50

question 43

Essay

Waldo Mining Company currently is operating at less than 50% of practical capacity.The management of the company expects sales to drop below the present level of 10,000 tons of ore per month very soon.The sales price per ton is $3 and the variable cost per ton is $2.Fixed costs per month total $10,000.
Management is concerned that a further drop in sales volume will generate a loss and,accordingly,is considering the temporary suspension of operations until demand in the metals market rebounds and prices once again rise.Management has implemented a cost reduction program over the past year that has been successful in reducing costs to the point that suspension of operations appears to be the only viable alternative.Management estimates that suspension of operations would reduce fixed costs from $10,000 to $4,000 per month.
REQUIRED:
Why does management estimate that the fixed costs will persist at $4,000 even though the mine is temporarily closed?

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