Birch Company normally produces and sells 45,000 units of RG-6 each month. The s
ID: 2578754 • Letter: B
Question
Birch Company normally produces and sells 45,000 units of RG-6 each month. The selling price is $30 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total $46,000 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 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 $49,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $15,000. Because Birch 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?
Explanation / Answer
1. If Birch Company close the plant:
Advantage
Saving in Fixed Manufacturing Cost $49,000*2=$98,000
Saving in Fixed Selling Cost 10% * ($46,000*2)= $9,200
Disadvantage
Extra Cost at the end of period = $15,000
Contribution Loss= 2*20*10,000 = $4,00,000
Net Disadavantage = $400,000+$15,000-$98,000-$9,200= $ 307,800
2. If Plant Continues operating for 2 months
Selling Value = (10,000*2)*$30=$600,000
Variable Cost = (10,000*2)*$10 = 200,000
Contribution = Selling Value-Variable Cost
Contribution = $600,000-$200,000=$400,000
Fixed Manufacturing Cost=$150,000*2= $300,000
Fixed Selling Cost = $46,000*2= $92,000
Profit/(loss)=contribution-Fixed Manufacturing Cost-Fixed Selling Cost
Profit/(loss)=$400,000-$300,000-$92,000 = $8,000
If Plant shut down operating for 2 months:
Fixed Manufacturing Cost =$150,000*2 = $300,000
Saving in Fixed Manufacturing Cost $49,000*2=$98,000
Net Fixed Manufacturing Cost = $300,000-$98,000 = $202,000
Fixed Selling Cost = $92,000
Saving in Fixed Selling Cost 10% * ($46,000*2)= $9,200
Net Fixed Selling Cost = $82,800
Start-up costs at the end of the shutdown period = $15,000
Total Cost =$202,000+$82,800+$15000= $299,800
Profit on continues the plant is $8,000 and Loss on shut down the plant is $299,800
So, plant should be continues for 2 months
3. Indifferent between closing the plant or keeping it open
Total Cost if pant shut down =$202,000+$82,800+$15000= $299,800
so loss on plant open should be the same i.e. $299,800
for that Contibution - Fixed Manufacturing Cost - Fixed Selling Cost = - $299,800
Fixed Manufacturing Cost + Fixed Selling Cost = $300,000+$92000= $392,000
Contibution = $392,000 - $299,800 = $92,200
Contibution per Unit = selling price per unit - variable cost per unit
Contibution per Unit = $30 - $10 = $20
Selling unit at indifferent point = 92,200/20 = 4610 Units
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