Birch Company normally produces and sells 44,000 units of RG-6 each month. The s

Question

Birch Company normally produces and sells 44,000 units of RG-6 each month. The selling price is $25 per unit, variable costs are $17 per unit, fixed manufacturing overhead costs total $170,000 per month, and fixed selling costs total $30,000 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 11%. 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?

Explanation / Answer

Birch Company Normal Production of RG-6 44000 Units Selling Price Per Units $              25.00 Variable Price Per Units $              17.00 Contribution Margin Per Unit=($25-$17) $                 8.00 Total Contribution=(44000*$8) $    352,000.00 Less: Fixed Manufacturing Exp $    170,000.00 Less: Fixed Manufacturing Exp $      30,000.00 Net Income $    152,000.00 1) Production in case of strike in two months=(8000*2) $      16,000.00 Contribution lost by closing the plant(16000*$8) $ (128,000.00) Saving of fixed cost in case of shut down($43000*2) $      86,000.00 Saving of fixed selling expenses=($30000*11%*2) $        6,600.00 Net loss before start up $    (35,400.00) Add: Start up cost $    (13,000.00) Total disadvantage of closing plant $    (48,400.00) 2) No it is not advantageous for a Birch company to close its plant for two months because its result incease loss by $48400. 3) Company would be indifferent =(Avoidable fixed cost)/Contribution Margin per unit Company would be indifferent =($86000+$6600)/$8 $      11,650.00

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