Final answer:
1) Closing the plant for two months would result in a financial advantage of $256,000 for Birch Company.
2) There is no level of unit sales at which Birch Company would be indifferent between closing the plant and keeping it open.
Explanation:
To determine the financial advantage or disadvantage of closing the plant for two months, we need to compare the costs and revenues for both scenarios: keeping the plant open and closing the plant.
1. Keeping the Plant Open:
- Sales per month: 30,000 units
- Selling price per unit: $22
- Variable cost per unit: $14
- Fixed manufacturing overhead costs per month: $150,000
- Fixed selling costs per month: $30,000
Total revenue per month: 30,000 units $22 = $660,000
Total variable costs per month: 30,000 units $14 = $420,000
Total fixed costs per month: $150,000 + $30,000 = $180,000
Profit per month:
Total revenue - Total variable costs - Total fixed costs
= $660,000 - $420,000 - $180,000
= $60,000
Total profit for two months: $60,000 2 = $120,000
2. Closing the Plant:
- Sales per month: 8,000 units
- Selling price per unit: $22
- Variable cost per unit: $14
- Reduced fixed manufacturing overhead costs per month: $150,000 - $45,000 = $105,000 (as the strike reduces the fixed costs)
- Reduced fixed selling costs per month: $30,000 - 10% of $30,000 = $27,000 (as the strike reduces the fixed costs)
Total revenue per month: 8,000 units $22 = $176,000
Total variable costs per month: 8,000 units $14 = $112,000
Total fixed costs per month: $105,000 + $27,000 = $132,000
Profit per month:
Total revenue - Total variable costs - Total fixed costs
= $176,000 - $112,000 - $132,000
= -$68,000 (a loss of $68,000 per month)
Total loss for two months: -$68,000 * 2 = -$136,000
3. Financial Advantage (Disadvantage) of Closing the Plant:
The financial advantage (disadvantage) of closing the plant for two months is the difference between the profit if the plant remains open and the loss if the plant is closed.
Financial advantage (disadvantage) = Profit (Keeping Plant Open) - Loss (Closing Plant)
= $120,000 - (-$136,000)
= $120,000 + $136,000
= $256,000
Therefore, if Birch Company closes its own plant for two months, it would have a financial advantage of $256,000.
4. Unit Sales for Indifference:
To determine the level of unit sales for the two-month period at which Birch Company would be indifferent between closing the plant and keeping it open, we need to find the point where the profit from keeping the plant open equals the loss from closing the plant.
Profit (Keeping Plant Open) = Loss (Closing Plant)
$60,000 2 = -$68,000 2
$120,000 = -$136,000
Since the profit cannot equal the loss, there is no level of unit sales at which Birch Company would be indifferent between closing the plant and keeping it open.
In summary, closing the plant for two months would result in a financial advantage of $256,000 for Birch Company. However, there is no level of unit sales at which Birch Company would be indifferent between closing the plant and keeping it open.