You're treating it like a commodity product focused on economies of scale (comparison to Crayola). As an outsider reading about it the last couple of weeks they did have good quantities but it feels like a repositioning as a quality leader makes sense. So switch the focus from cost leadership to differentiation (quality) in Porter terms.

I'm pretty sure the customers mentioned qualify as typical customers that are willing to pay a hefty premium for a product they love. tl;dr: scale down, focus on quality, charge more > shutdown