Birch Company normally produces and sells 31,000 units of RG-6 each month. RG-6
ID: 2550555 • Letter: B
Question
Birch Company normally produces and sells 31,000 units of RG-6 each month. RG-6 is a small electrical relay used in the automotive industry as a component part in various products. The selling price is $24 per unit, variable costs are $16 per unit, fixed manufacturing overhead costs total $155,000 per month, and fixed selling costs total $31,000 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 10,000 units per month. Birch Company estimates that the strikes will last for about two months, after which time sales of RG-6 should return to normal. Due to the current low level of sales, however, Birch Company is thinking about closing its own plant during the two months that the strikes are on. If Birch Company does close its plant, it is estimated that fixed manufacturing overhead costs can be reduced to $108,500 per month and that fixed selling costs can be reduced by 10%. Startup costs at the end of the shutdown period would total $10,000. Since Birch Company uses just-in-time production methods, no inventories are on hand Required 1-a. Assuming that the strikes continue for two months, compute the increase or decrease in income from closing the plant. in income 1-b. Would you recommend that Birch Co mpany close its own plant? Yes 0 2. At what level of sales (in units) for the two-month period should Birch Company be indifferent between closing the plant and keeping it open? Level of sales unitsExplanation / Answer
1. Calculation of current income
Contribution (24-16)X31000 = $248000
Less: Fixed cost (155000+31000) = $186000
Net income = $62000
if plant is countinue during the strike sales are 10000units
Contribution (10000X8) = 80000
Less: Fixed cost = 186000
Net loss = (106000)
Income decrease if plant is running 168000
if plant is closed during the strike
Total fixed cost incurred (108500+27900) = 136400
2. it is better to run the plant during the strike period because overall loss less than fixed cost (loss) will be incurred if plant is closed
3. Calculation of Shutdown point = Different in fixed cost/contribution per unit
= (136400-10000)/8 = 15800 unit
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