Birch Company normally produces and sells 42,000 units of RG-6 each month. RG-6
ID: 2598284 • Letter: B
Question
Birch Company normally produces and sells 42,000 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 $26 per unit, variable costs are $15 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total $44,000 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 $48,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $14,000. 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?
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 $48,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $14,000. Because Birch Company uses Lean Production methods, no inventories are on hand.
Explanation / Answer
1.a.
Sales per unit
$ 26
Less: variable cost
$ 15
Contribution margin
$ 11
No. of units sales during strike = 2 x 9,000 = 18,000
$ 11 x $ 18,000 = $ 198,000
Analysis for closing the plant:
*Contribution Margin lost
$ (198,000)
Add: **Fixed Manufacturing Overhead saving
$ 96,000
Add: ***Fixed Selling cost saving
$ 8,800
Disadvantage of closing
$ (93,200)
Add: Start-up cost
$ (14,000)
Net disadvantage of closing
$ (107,200)
*Contribution Margin lost for closing = $ 11 x 18,000 = $ 198,000
**Fixed Manufacturing Overhead saving = $ 48,000 x 2 = $ 96,000
***Fixed Selling cost saving = 2 x ($ 44,000 x 0.1) = 2 x $ 4,400 = $ 8,800
Company should continue the reduced level of production. On closing, the company will suffer additional loss of $ 107,200 during the strike of two months. Another aspect for continue the production is to hold some customer rather than losing all of them.
Answer:
Net income is reduced by $ 107,200 in two months.
2.
#Avoidable cost on closing the plant
$ 104,800
Less: Start-up cost
$ 14,000
Net Avoidable cost
$ 90,800
#Avoidable cost on closing the plant = Fixed Manufacturing Overhead saving + Fixed Selling cost saving
= $ 96,000 + $ 8,800 = $ 104,800
Units required = Net Avoidable cost/CM per unit = $ 90,800 /$ 11 = 8,254.55 or 8,255 units
Level of sales 8,255 units in two months
Sales per unit
$ 26
Less: variable cost
$ 15
Contribution margin
$ 11
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.