Question

6 Birch Company normally produces and sells 45,000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $175,000 per month, and fixed selling costs total $44.000 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 $48,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $15,000. 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 is complete but not entirely correct. 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? Financial $ 120,200 (disadvantage) Required 2

Answer 1

Birch Company Requirement 1 Sales revenue ($20) Less: Variable costs ($10) Fixed manufacturing costs Fixed selling costs Closing the Not closing Change in plant the plant Income 180000 -90000 -127000 -175000 -39600 -44000 Net Income -166600 - 129000 -37600 $37,600 is the decrease in net income per month. Apart from that, $15,000 will be the start-up costs at the end of 2 months period. Net total decrease in net income by closing the plant = ($37,600 x 2 months) + $15,000 -> $90,200 Requirement 2 Contribution margin per unit = $20 - $10 = $10 per unit (Level of sales that would make indifference - Break-even sales in units) = Avoidable fixed costs/Contribution margin per unit {($48,000 + ($44,000x10%])x 2 months - $15,000}/$10 89800 / 10 = 8980 units