Birch Company normally produces and sells 40,000 units of RG-6 each month. RG-6
ID: 2446493 • Letter: B
Question
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 $19 per unit, fixed manufacturing overhead costs total $170,000 per month, and fixed selling costs total $42,000 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 15,000 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 $60,000 per month and its fixed selling costs by 12%. 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.
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?
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 $19 per unit, fixed manufacturing overhead costs total $170,000 per month, and fixed selling costs total $42,000 per month.
Explanation / Answer
1a.
Previously before strike company was earning income of $28000 per month [40000 units (25-19) - 170000 - 42000]
If plant is closed company we will not be able to sell 15000 units that could have been sold but it would reduce its fixed manufacturing overheads by 60000 per month and fixed selling costs by 12%
Therefore, loss if the plant is closed = (170000-60000)+(42000 - (42000*12%)) = $146960 per month
Therefore for two months loss = $146960*2 + Start up cost = $306920
1b.
If plant is closed loss = $306920
If plant is not closed loss = (15000*6)-170000-42000 = $122000 per month * 2 months = $244000
Since loss if plant is not closed is less than if plant is closed therefore it is recommended not to close down the plant
2. 306920/2 = 153460
170000+42000-153460 = 58540
58540/6 = 9757 unis
At 9757 units company will be indifferent
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