Birch Company normally produces and sells 46,000 units of RG-6 each month. RG-6
ID: 2379994 • Letter: B
Question
Birch Company normally produces and sells 46,000 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 $47 per unit, variable costs are $19 per unit, fixed manufacturing overhead costs total $222,000 per month, and fixed selling costs total $300,000 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 13,000 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 $67,000 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.
Requirement 1:
(a) Assuming that the strikes continue for two months, compute the increase or decrease in income in closing the plant
Explanation / Answer
Selling Price $49 Variable cost $20 Contribution $29 Fixed cost $230,000 + 302,000 = 532,000 Breakeven point = 532,000 ÷ 29 = 18,345 units At this lavel, the company will be indifferent in keeping the plant open or closing the same. During closing down If the Plant in not closed: Sales = 10,000 units Contribution on 10,000 units = 10,000 X 29 = 290,000 Total Fixed cost = 532,000 Net Loss = 532,000 – 290,000 = 242,000 per month Loss for 2 months = 242,000 × 2 = 484,000 If Plant is closed Fixed Manufacturing overhead = 163,000 Fixed Selling costs = 277,840 Total fixed cost = 440,840 Total fixed cost for 2 months = 881,680 Start up cost = 13,000 Total loss due to close down = 894,680 Conclusion : Since the loss for 2 month in running the plant is $484,000 and for closing the plant is $894,680, it is recommended that plant should be allowed to remain working during this period.
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