Question

Birch Company normally produces and sells 43,000 units of RG-6 each month. The selling price is $24 per unit, variable costs are $15 per unit, fixed manufacturing overhead costs total $185,000 per month, and fixed selling costs total $36,000 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 11,000 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 8%. 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:

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

Answer
1a
Net Income during strike period
Particulars	Amount
Sales ( 11000*24*2)	$       528,000
Less: Variable Costs ( 11000*15*2)	$       330,000
Contribution	$       198,000
Loss Of contribution	$       198,000
Savings in fixed cost ( 44000*2)	$         88,000
Savings in fixed selling cost(36000*2*8%)	$           5,760
Loss Of net operating Income	$       104,240
Add: Start Up cost	$         13,000
Net Loss On closing the settup	$       117,240
1b : No -
Business should be continued
2) Total loss of net Income by closing business = 117520
Indifferent Sales = 104240/9 i.e 11,582 units