Suspend or close the activities due to trade recession

Sometimes it becomes necessary for a firm to temporarily suspend or close the activities of a particular product, department or factory as a whole due to trade recession. The decision to close down or suspend its activities will depend on whether products are making contribution towards fixed costs or not. If the products are making a contribution towards fixed costs, it is preferable not to close business or suspend its activities to minimize the losses. If the business is closed down there may be certain fixed costs which could be avoided but there will be certain expenses which will have to be incurred at the time of closing the operation like redundancy payments, necessary maintenance of plant or overhauling of plant on reopening, training of personnel etc. Such costs are associated with closing down of the business and must be taken into consideration before taking any decision. Fixed costs may be general or specific. General fixed costs may or may not remain constant while specific costs will be directly affected by the closing down of the operation. To conclude, if general fixed costs are likely to come down in the event of closure or suspension of activities, the excess of contribution over specific fixed costs will have to be compared with reduction in general fixed cost. If the former exceeds the latter it is profitable to continue the activities and close down or suspend activities if the latter exceeds the former. In addition to cost consideration, there may be some non- cost considerations which may weigh in taking the decision to close down or suspend its activities or not. The followings non cost considerations are relevant in this respect :

• Once the business is closed down, competitors may establish their products and our business may be lost. It may be difficult to recapture the lost market again; heavy advertisement charges may have to be incurred to recapture the business again.
•  Fear of retrenchment of worker. If worker are discharged it may be difficult to get experienced and skilled workers again at the restart of the business.
• Plant may become obsolete with the closure of the business and heavy capital expenditure may have to be incurred on restart of the business.
• Reputation of the firm may suffer if some activities are closed down or suspended.
• Temporary closing down or suspending activities may not be desirable if the relationship with the suppliers is adversely affected.
• Fear of non collection of dues from customers in case of close of business may not go in favor of closure of business.