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

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= ???

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.)

Explanation / Answer

Richter Company All Amounts in $ The current profit per unit = $ 43 - $ 41.70 = $ 1.30 per unit For three months, the Company operates at 20% of its normal levels Hence, sales for three months will be 20% of 75,000 = 15,000 units Net Profit if plant is kept open for three months = 15,000 X $ 1.30 = $ 19,500. If plant is shut down Increase in profits Fixed Manufacturing Overheads reduced by 35% of $ 4 1.4 Reduction in Fixed Selling Expenses 2 Total reduction in costs 3.4 Impact of closing the plant down will be an increase in profits per unit by $ 3.40 In absolute terms, this works out to an increase of 15,000 units X $ 3.40 = 51000 $

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