Question

Part F: Relevant Cost/Shutting Down or Continuing to Operate a Plant
Birch Company normally produces and sells 43,000 units of RG-6 each month. The
selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing
overhead costs total $160,000 per month, and fixed selling costs total $38,000 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 $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?

Please No image Only Table or excel sheet

Answer 1

Answer 1

	Manufacture for 2 months	Close for 2 months	Incresae (decrease) in income
Sales (2 months*9000*20)	360,000		(360,000)
Variable cost (2*9000*10)	(180,000)		180,000
Fixed manufacturing overhead costs (160000*2) ; ((160000-48000)*2)	(320,000)	(224,000)	96,000
Fixed selling cost (38000*2); (76000*(1-10%))	(76,000)	(68,400)	7,600
Startup cost if Close for 2 months		(13,000)	(13,000)
Net income (loss)	(216,000)	(305,400)	(89,400)
Financial advantage (disadvantage)			(89,400)

Answer 2

Net loss would be incresaed if the plant will close. Threfore, Plant should not be closed for 2 months.

Answer 3

At indifferent between closing the plant or keeping it open would be arise when both have same operating results.
Net loss for 2 months if closed	(305,400)
Add: Fixed selling cost	76,000
Add: Fixed manufacturing overhead costs	320,000
Contribution margin required	90,600
Divided by: Contribution margin per unit (20-10)	10
Units sold for 2 months	9,060