Question

Birch Company normally produces and sells 48,000 units of RG-6 each month. RG-6 is a small electrical relay used as a component part in the automotive industry. The selling price is $25 per unit, variable costs are $16 per unit, fixed manufacturing overhead costs total $190,000 per month, and fixed selling costs total $32,000 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 11%. 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:

1a.	Assuming that the strikes continue for two months, what is the impact on income by closing the plant?
	NET INCOME IS _________BY_______IN TWO MONTHS

1b.	Would you recommend that Birch Company close its own plant?
	No Yes

2.	At what level of sales (in units) for the two-month period should Birch Company be indifferent between closing the plant or keeping it open? LEVEL OF SALES______UNIT IN TWO MONTHS

Answer 1

1a. Net Income is reduced by 360,960 in two months

Total Loss if the unit is Shut Down for two months
		Expenses/Month	No.of Months
	Fixed Manufacturing Overhead (190,000-44,000)	146,000.00	2	292,000.00
	Fixed Selling Costs (32000-(32000*11%)	28,480.00	2	56,960.00
		174,480.00		348,960.00
	Start Up Expenses at the End			12,000.00
				360,960.00

1b.

Recommendation : No

Total Loss if operating with 12000 for two months is 228,000, where if the plant is shut down, the cost would be 360,960.

Income Statement for 12000 Units
	Sales	12000	25.00	300,000.00
	Cost of Goods Sold
	Variable Cost	12000	16.00	192,000.00
	Fixed Manufacturing Overhead	12000	15.83	190,000.00
				382,000.00
	Gross Loss	12000	(6.83)	(82,000.00)
	Operating Expenses
	Fixed Selling Costs	12000	2.67	32,000.00
	Operating Loss			(114,000.00)
Total Loss for two months if operating		(114,000.00)	2	(228,000.00)

2.

9227 units in two months

Units to be produced for two months in order to cover the shutdown cost
	Sales	9227	25.00	230,675.00
	Variable Cost	9227	16.00	147,632.00
	Fixed Manufacturing Cost for two months	=190000*2		380,000.00
	Fixed Selling Cost for two months	=32000*2		64,000.00
	Total Expenses			591,632.00
				(360,957.00)