Richter Company has a single product called a Wim. The company normally produces

Question

Richter Company has a single product called a Wim. The company normally produces and sells 75,000 Wims each year at a selling price of $43 per unit. The company’s unit costs at this level of activity are given below:

Direct materials $ 8.10

Direct labor 13.00

Variable manufacturing overhead 4.90

Fixed manufacturing overhead 4.00

Variable selling expenses 5.70

Fixed selling expenses 6.00

Total cost per unit $ 41.70

3. One of the materials used in the production of Wims is obtained from a foreign supplier. Civil unrest in the supplier’s country has caused a cutoff in material shipments that is expected to last for three months. Richter Company has enough material on hand to operate at 20% of normal levels for the three-month period. As an alternative, the company could close the plant down entirely for the three months. Closing the plant would reduce fixed manufacturing overhead costs by 35% during the three-month period and the fixed selling expenses would continue at two-thirds of their normal level. What would be the impact on profits of closing the plant for the three-month period? (Round your intermediate calculations of units produced and sold to the nearest whole number. Do not round your other intermediate calculations. Round your final answer to nearest whole number.)

Net advantage of closing the plant= ?

Please show some equations

Explanation / Answer

Answer 1. a. Statement of Incremental Net Operating Income Incremental Revenue Incremental Sales - 75000 Units X 20% X $43                645,000 Incremental Cost Direct Material (15000 Units X $8.10)                 (121,500) Direct Labor (15000 Units X $13)                 (195,000) Variable MOH (15000 Units X 4.90)                    (73,500) Variable Selling Exp. (15000 Units X $5.70)                    (85,500) Fixed Selling Exp.                 (110,000)             (585,500) Net Incremental Profit / (Loss)                  59,500 Answer 1. b. Yes, Increased Fixed Selling expenses id Justified. Answer 2. Calculation of Break Even price per Unit Direct Material                           8.10 Direct Labor                        13.00 Variable MOH                           4.90 Import Duties, Foreign Permits, etc ($9000 / 15000 Units)                           0.60 Shipping Costs                           4.70 Break Even Price                        31.30 Answer 3. Statement of Diffrenetial Costing Option 1 Option 2 Difference (manufacturing at 20% Normal Level) Shut Down the Plant Revenue Sales (3750 Units X $43)                    161,250                           -                  (161,250) Expenses Direct Material                      30,375                           -                       30,375 Direct Labor                      48,750                           -                       48,750 Variable MOH                      18,375                           -                       18,375 Variable Selling Exp.                      21,375                           -                       21,375 Fixed MOH                    187,500                121,875                     65,625 Fixed Selling Exp.                    112,500                  75,000                     37,500 Total expenses                    418,875                196,875                   222,000 Net income                 (257,625)             (196,875)                     60,750 Net advantage of Closing the Plant = $60750 No of Units Produced in 3 Months = 75000 Units X 3/12 = 3750 Units Answer 4. Calculation of Relevant Unit Cost Direct Material                           8.10 Direct Labor                        13.00 Variable MOH                           4.90 Variable Selling Exp.                           5.70 Relevant Unit Cost                        31.70

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