Question

Birch Company normally produces and sells 44,000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $190,000 per month, and fixed selling costs total $44,000 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 $46,000 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 1 Required 2 Required 3 What is the financial advantage (disadvantage) if Birch closes its own plant for two months? Birch Company normally produces and sells 44,000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $190,000 per month, and fixed selling costs total $44,000 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 $46,000 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 1 Required 2 Required 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? Unit sales required for Birch to be indifferent < Required 2 Required 3 >

Answer 1

Birch Company is considering whether to shut down its plant for two months due to reduced sales because of strikes. The financial advantage or disadvantage of a shutdown involves analyzing fixed and variable costs, revenues, and one-time startup costs post-shutdown. To determine the indifference point of sales level, a comparison is made between total costs in both operational and shutdown scenarios.

Step-by-step explanation:

The student's question pertains to the decision Birch Company must make regarding whether to shut down its plant for two months during a period of reduced sales due to strikes. To answer the three parts of the question, we have to consider fixed costs, variable costs, revenue, and the shutdown rule which states that a firm should continue to operate if the price is above average variable cost, as this allows covering variable costs and contributing to some fixed costs, thereby minimizing losses.

Required 1: Financial Advantage (Disadvantage) of Plant Shutdown

If the plant is shut down for two months, Birch Company will save on some fixed manufacturing overhead costs and selling costs. Specifically, there will be a reduction of $46,000 per month in manufacturing costs and a 10% reduction in selling costs (amounting to $4,400 per month), totaling a cost saving of $50,400 per month.

However, the company must also consider the one-time startup cost of $14,000 at the end of the shutdown. Over two months, the total savings would be $100,800, minus the one-time startup costs, resulting in net savings of $86,800.

Required 2: Should Birch Close the Plant?

Birch should close the plant if the cost savings exceed the contribution margin lost from selling 8,000 units per month. However, since this isn't explicitly provided, we cannot definitively answer without further calculation of costs versus sales revenue during the shutdown.

Required 3: Indifference Point Between Closing and Keeping Plant Open

To find the level of unit sales at which Birch Company would be indifferent between closing the plant or keeping it open, we compare the total costs in both scenarios. We look for the sales level where the contribution margin exactly covers the fixed costs with and without shutdown costs. This requires setting up an equation and solving for the number of units sold.