Question

Birch Company normally produces and sells 46,000 units of RG-6 each month. The selling price is $30 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $170,000 per month, and fixed selling costs total $34,000 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 $44,000 per month and its fixed selling costs by 10%. 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? 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 2 > Financial advantage Financial (disadvantage)

Answer 1

Very often it become necessary for companies to shut down the plant , but this decision is depend on marginal cost analysis. If product is making contribution toward fixed expenses than it is better to continue the operation . In other words if selling price is above than marginal cost , it is preferable to continue because losses are minimised.

Indifferent point is the point where Losses from shut down and losses from Continue the plant are same .

Answer

1. Financial Disadvantages if birch Company Closed its own Plant is $ 1,70,600

2. No.

Reason: Loss from Continue the plant operation is $ 72000 is less than Loss from shut down the plant for two months i.e. $170600.

Closed down the plant for two months is not preferable as company has to incurred extra loss (170600-72000) $ 98600 .

3. indifferent point is 11870 units sales for two months , where loss from shut down and continue to open the pant is same .

= 30 Selling Price Veriable Cost Contribution Per Unit 10 = 30-10=20 Fixed Manufacturing Overhead Fixed Selling Cost Total Fixed Cost 170000 Per Month 34000 Per Month 204000 Per Month Strick is for 2 months Fixed Cost for 2 months = 204000*2= 408000 408000 Loss On Operation if continue to open Plant Fixed Cost for 2 months Less : Contribution (12000* 20*2months) Loss On Operation if continue 480000 -72000 If Birch Company Closed his plant for two months, Unavoidable fixed costs are continue to incurred. After two months when Birch Company Start Up plant than start up cost Would $14,000. Loss On shut Down Unavoidable Fixed Cost Manufacturing Overhead Fixed Selling Cost 126000 (170000-44000) (34000-10% on it) 30600 1566001 Add: Start up Cost Loss On shut Down 14000 170600 Financial Disadvantages if birch Company Closed its own Plant $170,600 3 Calculations for indifferent point Fixed cost incurred if continue to opn plant - Loss on shut Down Contribution per unit = 408000-170600 20 11870 units

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