Question

Birch Company normally produces and sells 49,000 units of RG-6 each month. The selling price is $30 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $175,000 per month, and fixed selling costs total $34,000 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 $44,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $15,000. 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)

If the Birch company continue its sale,then it's profit/(loss) per month:

Sales-variable cost-fixed manufacturing costs-fixed selling cost

=($30×10000units)-($10×10000units)-$175000-$34000

=($9000)loss per month.

If Birch company stops the sale then it's loss:

Fixed manufacturing costs+Fixed selling cost+start up costs

($175000-$44000)+($34000×90%)+$15000

=$176600

Answer for 1)

The financial disadvantage If Birch codes its own plant for two months there will be increase in loss of $335200[$(176600-9000)×2months].

Answer for 2)

No,Birch should not close the palnt for two months as it is better to bear the loss of $18000($9000×2months) than bearing the loss of $353200($176600×2 months).

Answer for 3)

The units to be sold for two month period where birch company be indirect between closing the plant or keeping it open(assuming that no. of units to be sold for bearing the loss of $176600 as it is the point where there will be no difference of closing or keeping it open):

Fixed costs to be covered/Contribution

Fixed costs to be covered:$175000+$34000-$176600

=$32400 per month

Contribution =sales-variable variable costs=$30-$10=$20

Sales in units to bear the loss of $176600=$32400/$20

=1620 units per month and 3240 units per two months (1620 units×2months)