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ID: 2582164 • Letter: A
Question
apex company net in apex company net in apex company net in apex company net in Birch Company normally produces and sells 45,000 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 $16 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total $32,000 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 $44,000 per month and its fixed selling costs by 8%. Start-up costs at the end of the shutdown period would total $13,000. Because Birch Company uses Lean Production methods, no inventories are on hand 5 Required Assuming that the strikes continue for two months, what is the impact on income by closing the plant? b Would you recommend that Birch Company close its own plant? No 2At what level of sales (in units) for the two-month period should Birch Company be indifferent between closing the plant or keeping it open?Explanation / Answer
Answer:
Income with out strike per month is
45000*25 - 45000*16 - $150000 -$32000 = $223000
Income after strike per month is
10000*25 -10000*16 - (150000-44000) - 32000*(1-0.08) = -$45440
Net income has gone in to negative they will be operating at loss for these two months and impact on income would be
Income without strike - Income after strike = 223000 - (-45440) = $268440
Company should close the plant otherwise there loss owuld be more. 13000 startup cost would easily be covered by the amount saved in fixed manufacturing costs
Answer 2: The amount reduction in the fixed costs by closing the plant should be covered by contribution cost per unit
Contribution per unit = 25-16 = $9
Amount saved in fixed costs on closing the plant(per month) = 44000 + 32000 *0.08 - 6500(startup cost)
=40060
Divide this by 9 to get number of units
=40060/9 = 4452 no of units approx
Add this in 10000 to get no of units per month 14452
For two month 2*14452 = 28904 no of units
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