Return to question Birch Company normally produces and sells 43,000 units of RG-
ID: 2580689 • Letter: R
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Return to question Birch Company normally produces and sells 43,000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $160,000 per month, and fixed selling costs total $32,000 per month 2.5 points 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 11,000 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 $41,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $15,000. Because Birch Company uses Lean Production methods. inventories are on hand. 01:35:24) 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? Answer is complete but not entirely correct. 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? Financial (disadvantage) $ 146,600Explanation / Answer
3) The level of units at which Birch company would be indifferent between closing the plant or keeping it open is the level at which net cost incurred in both the situations are equal. This is calculated by dividing difference in fixed cost of two alternatives by contribution per unit (which is $10 per unit in this question)
When the Company keeping it open :-
Fixed manufacturing overheads cost (2 months) = $160,000*2 = $320,000
Fixed selling costs (2 months) = $32,000*2 = $64,000
Total Fixed Cost = $384,000
When the company shut down the plant :-
Fixed manufacturing cost = ($160,000-$41,000)*2 months = $238,000
Fixed Selling Cost = ($32,000*90%)*2 months = $57,600
Shut down cost = $15,000
Total Fixed Cost = 310,600
Contribution margin per unit = Selling Price - variable cost = $20-$10 = $10 per unit
Indifference Point (units) = ($384,000-$310,600)/$10 per unit = 7,340 units
Thus at 7,340 units of sales for the two month period Birch company would be indifferent between closing the plant or keeping it open.
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