Question

Birch Company normally produces and sells 48,000 units of RG-6 each month. The selling price is $25 per unit, variable costs are $17 per unit, fixed manufacturing overhead costs total $175,000 per month, and fixed selling costs total $36,000 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 $46,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $12,000. 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?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Part 1) Financial advantage / (disadvantage ) if Birch closes it plants for two months = Saving in Fixed Cost - Loss of contribution margin-cost of start up at the end of shutdown period = (46000*2)+(36000*10%*2)-(9000*2*(25-17)) - 12000 = 92000+7200 - 144000-12000 = - $ 56800 Thus the financial disvantage of $(56800) Part 2) No Birch should not close the plant as it leads to financial disavantage of $(56800) - Part 3) - 0 = Saving in Fixed Cost - Loss of contribution margin-cost of start up at the end of shutdown period - 0= (46000*2)+(36000*10%*2)-(No. of units*2*(25-17)) - 12000 - No. of units = ((92000+7200)-12000)/16 = 5450 Units for 2 months For each months sales should be 5450 Units