Part F: Relevant Cost/Shutting Down or Continuing to Operate a
Plant
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 $38,000 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 9,000
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 $48,000 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?
Please No image Only Table or excel sheet
1.
| Differential Analysis - Continue plant for 2 months (alt 1) or Shutdown plant for 2 months (Alt2) | |||
| Particulars | Continue plant for 2 months (Alt 1) | Shut down plant for 2 months (Alt 2) | Increase (Decrease) in income of shutdown (Alternative 2) |
| Revenue (9000*2*$20) | $3,60,000 | $0 | -$3,60,000 |
| Costs: | |||
| Variable cost (9000*2*$10) | $1,80,000 | $0 | $1,80,000 |
| Fixed manufacturing overhead cost | $3,20,000 | $2,24,000 | $96,000 |
| Fixed selling cost | $76,000 | $68,400 | $7,600 |
| Startup cost at the end of shutdown period | $0 | $13,000 | -$13,000 |
| Income / (Loss) | -$2,16,000 | -$3,05,400 | -$89,400 |
2.
No.
3.
Level of sales to be indifferent = (Avoidable Fixed Cost - Startup cost) / Contribution margin per unit
= (96000+7600-13000) / (20-10)
= 90600/10
= 9060 units
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