Birch Company normally produces and sells 47000 units of RG-6 each month. The se
ID: 2510913 • Letter: B
Question
Birch Company normally produces and sells 47000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $165,000 per month, and fixed selling costs total $48,000 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 9,000 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 $41000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $13,000. Because Blrch Company uses Lean Production methods, no inventories are on hand Required 1. What is the financial advantage (disadvantage) if Birch closes its own plant for two months? 2. Should Birch close the plant for two months? 3. At what level of unit sales for the two-month period would Birch Company be indifferent between closing the plant or keeping it open? Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3 s the financial advantage (disadvantage) if Birch closes its own plant for two months? 8Explanation / Answer
SOLUTION
(A) Product RG-6 yields a contribution margin of $10 per unit ($20 - $10 = $10). If the plant closes, this contribution margin will be lost on the 18,000 units (9,000 units per month * 2 months) that could have been sold during the two-month period. However, the company will be able to avoid certain fixed costs as a result of closing down. The analysis is:
(B) No, the company should not close the plant; it should continue to operate at the reduced level of 9,000 units produced and sold each month. Closing will result in a $101,400 greater loss over the two-month period than if the company continues to operate.
(C)
Units = Net avoidable cost / Contribution margin per unit
= $78,600 / $10 = 7,860 units
Amount ($) Amount ($) Contribution margin lost by closing the plant for two months ($10 * 18,000 units) (180,000) Costs avoided by closing the plant for two months: Fixed manufacturing overhead cost ($41,000 * 2 months) 82,000 Fixed selling costs ($48,000 * 10% * 2months) 9,600 91,600 Net disadvantage of closing, before start-up cost (88,400) Add start-up costs 13,000 Disadvantage of closing the plant 101,400Related Questions
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