Birch Company normally produces and sells 43,000 units of RG-6 each month. RG-6
ID: 2477644 • Letter: B
Question
Birch Company normally produces and sells 43,000 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 $28 per unit, variable costs are $20 per unit, fixed manufacturing overhead costs total $180,000 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 14,000 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 $60,000 per month and its fixed selling costs by 9%. Start-up costs at the end of the shutdown period would total $12,000. Because Birch Company uses Lean Production methods, no inventories are on hand.
Q 1. Assuming that the strikes continue for two months, what is the impact on income by closing the plant?
Q 2.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 43,000 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 $28 per unit, variable costs are $20 per unit, fixed manufacturing overhead costs total $180,000 per month, and fixed selling costs total $32,000 per month.
Explanation / Answer
1) Running the shutting the plant plant Selling price 28 28 Number of units( 14000*2) 28000 0 Sales value 784000 0 Less : Variable cost ( 20 * 14000*2) 560000 0 Contribution 224000 0 Less : Fixed manufacturing cost 360000 240000 fixed selling cost 64000 58240 Shut down cost 12000 Net operating loss -200000 -310240 If the strike continues for 2 months the net loss would increase by 110240 from net loss of 200000 to 310240 2) Running the shutting the plant plant Selling price 28 28 Number of units 14220 0 Sales value 398160 0 Less : Variable cost ( 20 * 14220) 284400 0 Contribution 113760 0 Less : Fixed manufacturing cost 360000 240000 fixed selling cost 64000 58240 Shut down cost 12000 Net operating loss -310240 -310240 If the net operating loss while running the plant is 310240, the company will be indifferent between running or shutting the plant hence for running the plant Contribution - fixed cost = 310240 Contribution = net operating loss + fixed cost = -310240 + 424000 = 113760 Contribution per unit = 28 -20 =8 hence units required = 113760 / 8 = 14220 when the company sells 14220 units it will be indifferent if it either shuts the plant or keeps it open
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