Birch Company normally produces and sells 48,000 units of RG-6 each month. The s

ID: 2558997 • Letter: B

Question

Birch Company normally produces and sells 48,000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $185,000 per month, and fixed selling costs total $36,000 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 8,000 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 $43,000 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 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 1Required 2 Required 3 What is the financial advantage (disadvantage) if Birch closes its own plant for two months? Required Required 2>

Explanation / Answer

Answer

Data is formulated for 2 months, considering alternatives if the production is not shut down and if its shut down.

If not closed/Shut down

If Shut down

based on 16000 units [8000 units each month]

2 month cost

Sales Revenue

$320000

Variable cost

$(160000)

Fixed manufacturing overhead

(370000)

(284000)

Fixed Selling Overhead

(72000)

(64800)

Start Up Cost

(14000)

Net Income (Loss)

$(282000)

$(362,800)

Answer 1: If Company Shuts down for 2 months, it will be at a FINANCIAL DISADVANTAGE of $80,800 [362800 – 282000]

At Indifferent point, cost or net benefit under both alternative would be equal.

Let the units produced at Indifferent point be ‘x’

Then,

Net Benefit if not closed = Net Benefit if shut down

(20x - 10x)-370000-72000=-284000-64800-14000

10x - 442000 = - 362800

10x = 442000 – 362800

x = 79200 / 10

x = 7920 units

Hence, at 7920 units level, the company will be indifferent whether it continues or shuts down its plant.