Birch Company normally produces and sells 46,000 units of RG-6 each month. RG-6
ID: 2580677 • Letter: B
Question
Birch Company normally produces and sells 46,000 units of RG-6 each month. RG-6 is a small electrical relay used as a component part in the automotive industry. The selling price is $25 per unit, variable costs are $14 per unit, fixed manufacturing overhead costs total $175,000 per month, and fixed selling costs total $38,000 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 $42,000 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.
At what level of sales (in units) for the two-month period should Birch Company be indifferent between closing the plant or keeping it open?
Birch Company normally produces and sells 46,000 units of RG-6 each month. RG-6 is a small electrical relay used as a component part in the automotive industry. The selling price is $25 per unit, variable costs are $14 per unit, fixed manufacturing overhead costs total $175,000 per month, and fixed selling costs total $38,000 per month.
Explanation / Answer
Birch Company 1a) Assumption that strikes continues for 2 months Manufacturing overhead Selling costs Total Total fixed cost 175000 38000 213000 Avoidale fixed cost 42000 3800 45800 Unavoidable fixed cost 133000 34200 167200 Multiply by 2 month 266000 68400 334400 Add : start up costs 15000 Total NET LOSS 349400 Requirement 1 Impact on income by closing down the plant Loss of $349400 for 2 months 1b) Avoidable fixed costs are =42000*2+3800*2-15000 76600 We will recommend the Birch Company not to close its plant as contribution margin of 2 month($220000) is greater than avoidable fixed costs. 2) Indifference Point =Avoidable fixed cost/Contribution per unit =76600/11 Sales of 6964 units for 2 months We appreciate the rating of our answers Thank You
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