A company normally produces and sells 48,000 units of RG-6 per month. The sellin

Question

A company normally produces and sells 48,000 units of RG-6 per month. The selling price is $26 per unit with variable costs of $20 per unit. Fixed manufacturing overhead costs total $185,000 per month and fixed selling costs total$36,000 each month.

Contract strikes of the companies that buy these units have caused sales to drop to 13,000 each month. The strikes are estimated to last for 2 more months before sales will return to normal. Due to low activity levels the company is think of shutting down its own plant during the strike which would reduce fixed manufacturing overhead costs by $60,000 per month and fixed selling costs by 9%. Startup costs at the end of the shutdown period would total$13000. The company uses lean producton methods so no inventory is on hand.

1)Assuming the strike lasts for 2 months, what is the impact on imcome by closing the plant?

2)At what level of sales (in units) for the two month period should the company be indifferent between closing the plant and keeping it open?

Explanation / Answer

2) Let the units sold during strike be X

Break Even Point = ((60000*2)+(36000*9%*2)+13000)-(X*6)

0 = ( 120000+6480+13000)-6x

6X = 139480

X = 23246 units

Break even units to be sold per month = 23246/2 i.e 11623 units

Particulars Amount Units sold during strike period 26000 Selling price per unit 26 Less: Variable cost per unit 20 Contribution per unit 6 Total Contribution lost 156000 Savings in Fixed manufacturing cost 120000 Saving in fixed selling cost 6480 Start up cost at the end 13000 Loss of income -16520

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