Question

Birch Company normally produces and sells 40,000 units of RG-6 each month. The selling price is $30 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $185,000 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 8,000 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 $42,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $13,000. Because Birch Company uses Lean Production methods, no inventories are on hand Required . 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

1
Sales	30
Less: Variable Costs	10
Contribution Margin	20
Contribution margin lost by closing the plant for two months 20*8000*2		(320,000)
Costs avoided by closing the plant for two months
Fixed manufacturing overhead cost 42000*2	84,000
Fixed selling costs 34000*10%*2	6,800	90,800
Net disadvantage of closing, before start-up costs		(229,200)
Add start-up costs		13,000
Disadvantage of closing the plant		(216,200)
2
No, Birch should Continue to operate
3
Cost avoided by closing the plant for two months	90,800
Less: Start-up costs	(13,000)
Net avoidable costs	77,800
Net avoidable costs/Per unit contribution margin	77800/20	3,890
3890 units