Question

Birch Company normally produces and sells 47,000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $195,000 per month, and fixed selling costs total $38,000 per month. Employment contract strikes in the companies that purchase the bulk of the RG-6 units have caused Birch Company's sales to temporarily drop to only 9,000 units per month. Birch Company estimates that the strikes will last for two months, after which time sales of RG-6 should return to normal. Due to the current low level of sales, Birch Company is thinking about closing down its own plant during the strike, which would reduce its fixed manufacturing overhead costs by $45,000 per month and its fixed selling costs by 10% Start-up costs at the end of the shutdown period would total $16,000. Because Birch Company uses Lean Production methods, no inventories are on hand. Required: 1. What is the financial advantage (disadvantage) if Birch closes its own plant for two months? 2. Should Birch close the plant for two months? 3. At what level of unit sales for the two-month period would Birch Company be indifferent between closing the plant or keeping it open? Complete this question by entering your answers in the tabs below. Required 1 | Required 2 Required 3 What is the financial advantage (disadvantage) if Birch doses its own plant for two months? Financial (disadvantage) < Required 1 Required 2 >

Answer 1

B C. D 1 1) Contribution margin lost per unit $20-$10 $10 per unit 2 Amount Amount Particulars 4 5 Contribution margin lost because of shutting down for 2 months 6 Savings in cost on shutting down for 2 months Fixed manufacturing cost Fixed selling costs $-180,000 $90,000 7 $ 7,600 $97,600 8 9 $ -16,000 $-98,400 10 Shut down costs 11 Financial Disadvantage because of shutting down for 2 months 12. 13 14 15 2) 16 As there is a financial disadvantage of ($98,400) for two months, 17 No, Birch shoud not close the plant 18 3) 19 Net aviodable costs $97,600-16,000 20 Net aviodable costs $81,600 21 22 Indifferent level of sales Net avoidable cost / Contribution margin per unit 23 Indifferent level of sales $81,600/10 24 Indifferent level of sales 8,160 units 25

В C 1 1) Contribution margin lost per unit $20-$10 $10 per unit 2 3 Particulars Amount 4 Amount 5 Contribution margin lost because of shutting down for 2 months -9000 10*2. Savings in cost on shutting down for 2 months: 6 45000*2 Fixed manufacturing cost 7 - 38000*10%*2 B7+B8 Fixed selling costs 8 -16000 +C5+C8+C10 10 Shut down costs 11 Financial Disadvantage because of shutting down for 2 months