Question

*Please make sure to round discount factor to 3rd decima place as listed*

Birch Company normally produces and sells 40,000 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 $18 per unit, fixed manufacturing overhead costs total $180,000 per month, and fixed selling costs total $50,000 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 $49,000 per month and its fixed selling costs by 11%. 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:

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? Yes No 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

1. Breach company will incur Loss of 560,000 due close of Plant.

	Normal Activity
Sales	2,000,000.00
Varaible Costs	1,440,000.00
Contibution	560,000.00
Fixed Manufactring Costs	360,000.00
Fixed Selling Costs	100,000.00
Startup Cost	-
Net Income(Loss)	100,000.00

Loss in Net Income	100,000.00
Fixed Manufactring Costs	360,000.00
Fixed Selling Costs	100,000.00
Startup Cost	-
Net Loss due to Shut Down	560,000.00

1b.

Yes, Plant should be closed for two months as will benefit from the financial advantage of 248,000

	Alternative 1	Alternative 2	Differential
Sales	550,000	-
Varaible Costs	396,000	-
Contibution	154,000	-	(154,000.00)
Fixed Manufactring Costs	360,000	262,000	98,000.00
Fixed Selling Costs	100,000	89,000	11,000.00
Startup Cost	-	13,000	(13,000.00)
Net Income	(306,000)	160,000	(58,000.00)

Financial Advantage
Loss in Alternative 1	(306,000.00)
Loss in Alternative 2	(58,000.00)
Financial Advantage of Closing Down	248,000.00

3.

Indifference Point	Difference in Fixed Cost/Different in Contribution
	Alternative 1	Alternative 2
Fixed Cost
Fixed Manufactring Costs	360,000	262,000
Fixed Selling Costs	100,000	89,000
Startup Cost	-	13,000
	460,000	364,000
Indifference Point	13,714

SP per Unit	25
VC per Unit	18
Contributin per Unit	7

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