Birch Company normally produces and sells 42.000 units of RG-6 each month. The s
ID: 2511990 • Letter: B
Question
Birch Company normally produces and sells 42.000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $195.000 per month, and fixed selling costs total $50,000 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 $13,000. 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? Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) if Birch closes its own plant for two months? inancial (disadvantage)Explanation / Answer
Answer 1
To compute the financial advantage/(disadvantage) let us see how the company profits would be in case the business continues to produce with reduced sales and when the business goes for a shutdown.
Hence we can see a financial disadvantage of $409,000 in total.
Answer 2
Going by the above comparative analysis, we can see a net financial disadvantage if the business is shut down for two months to the tune of $119,000 (difference of $ -290,000 and $ -409,000). Hence the business should not shut down its operations.
Answer 3
Let 'X' units be the level of sales for two months at which the company would be indifferent in between closing the plant or keeping it open.
Hence at sales level of 4050 units the company would be indifferent in the decision between closing the plant or keeping it open.
Particulars Formula Affected Shut Down Units of Sales A 10,000 0 Contribution per unit B 10 10 Total Contribution C=A*B 1,00,000 0 Fixed Manufacturing Over head Costs D 1,95,000 1,53,000 Fixed Selling costs E 50,000 45,000 Profit/(Loss) per month F=C-D-E -1,45,000 -1,98,000 Analysis Profit/Loss for two months G=F*2 -2,90,000 -3,96,000 Start up costs H 13,000 Net Profit/(Loss) for two months I=G-H -2,90,000 -4,09,000Related Questions
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