Question

Problem 11-24 Shutting Down or Continuing to operate a Plant [LO11-2] Birch Company normally produces and sells 41,000 units of RG-6 each month. The selling price is $25 per unit, variable costs are $16 per unit, fixed manufacturing overhead costs total $180,000 per month, and fixed selling costs total $42.000 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 12.000 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 $48.000 per month and its fixed selling costs by 9%. Start-up costs at the end of the shutdown period would total $14.000. 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 closes its own plant for two months? < Required 1 Required 2 >

Answer 1

Birch Company
Calculation Of Contribution margin per unit
Revenue :-
S.P p.u		25
Expenses :-
variable costs		16
Contribution margin p.u		9
Now,
If the company sales drop to 12000 units
Units produced = 12000 * 2 months = 24000
The profit that can be earned on these units
Contribution margin = 24000 * 9 = $ 216,000
Less:- Fixed manufacturing OH = 180000 * 2 = 360000
Fixed selling expenses = 42000 * 2 = 84000
Net loss incurred = 228000
Impact on profits
Net operating loss	228000
If company is closed down
Fixed manufacturing OH cost ( 180000 - 48000 )*2	264000
Fixed Selling cost ( 42000 * 91 % * 2)	76440
Start up cost	14000
Total Loss incurred by closing down the plant	354440
Net disadvantage of closing the plant	-126440
Part 1.financial disadvantage of closing the plant is net income decrease by 126440 in two months.
Part 2.No, I would not recommend closing the plant because it results in disadvantage of
$ 126440.
Part 3 -
Let us assume the level of sales ( units ) = x
360000 + 84000 - 9 x = 354440
444000 - 9 x = 354440
x = 9951 ( this is for 2 months )
For 1 month - 9951 /2 = 4975 units
Level of sales 9951 units in two months.
When 4975 units is produced for 2 months each, then the net operating loss incurred by production = 354440
and net operating loss incurred by closing the plant is also 354440, therefore, at this level the company would
be indifferent.