Question

Birch Company normally produces and sells 47,000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $200,000 per month, and fixed selling costs total $48,000 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 10,000 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 $49,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $16,000. 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

1.)
Particulars	Closes plant	Does not close plant
Volume	0	20000
S.P	$                                  20	$                                         20
Sales	$                                   -	$                              4,00,000
Variable costs	$                                   -	$                              2,00,000
Fixed costs
Manufacturing OH	$                       3,02,000	$                              4,00,000
Selling costs	$                          86,400	$                                 96,000
Startup costs	$                          16,000
Profits	$                     -4,04,400	$                            -2,96,000
Financial disadvantage on closing plant is
$                         -1,08,400
2.)
No plant should not be closed for two months
3.)
Financial disadvantage	$                       1,08,400
S.P	$                                  20
V.cost per unit	$                                  10
Cont p.u	$                                  10
Units that can be let off from current sales	10,840
Current sales	20,000
Indifferent point of sales	9,160
Indifferent point of sales per month	4,580

Please Like the solution if satisfied with the answer and if any query please mention it in comments...thanks