Question

Birch Company normally produces and sells 48,000 units of RG-6 each month. The selling price is $30 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $185,000 per month, and fixed selling costs total $42,000 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 $45,000 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?

Answer 1

Answer :

1. Computation of financial advantage (disadvantage) if Birch closes its own plant for two months

Contribution lost if plant is closed ( $ 20*20000 unit )	$ 400000
Total contribution (a)	$ 400000
Saving in Fixed cost if plant closed
Saving in fixed manufacturing cost ( $ 45000*2)	$ 90000
Saving in fixed selling costs ( $ 42000*10% *2 )	$ 8400
Less - start up cost	($ 14000)
Total saving (b)	$ 84400
Net loss if plant is closed for 2 month (a) - (b)	$ 315600

Working note -1

Contribution per unit = $ 30- $ 10 = $ 20

2. Company should not close the plant for 2 month if company will close the plant company will have net loss of $ 315600 compare to running the plant .

3. indifferent between point = saving in fixed cost / contribution per unit

= $ 84400 / $ 20 = 4220 unit