Birch Company normally produces and sells 46,000 units of RG-6 each month. RG-6 is a small electrical relay used as a component part in the automotive industry. The selling price is $25 per unit, variable costs are $14 per unit, fixed manufacturing overhead costs total $175,000 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 Companyâs 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 $42,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $15,000. Because Birch Company uses Lean Production methods, no inventories are on hand.
Required:
1a. Assuming that the strikes continue for two months, what is the impact on income by closing the plant?
1b. Would you recommend that Birch Company close its own plant? Yes No
2. At what level of sales (in units) for the two-month period should Birch Company be indifferent between closing the plant or keeping it open?
| Birch Company normally produces and sells 46,000 units of RG-6 each month. RG-6 is a small electrical relay used as a component part in the automotive industry. The selling price is $25 per unit, variable costs are $14 per unit, fixed manufacturing overhead costs total $175,000 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 Companyâs 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 $42,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $15,000. Because Birch Company uses Lean Production methods, no inventories are on hand. |
| Required: |
| 1a. | Assuming that the strikes continue for two months, what is the impact on income by closing the plant? |
| 1b. | Would you recommend that Birch Company close its own plant? | ||||
|
| 2. | At what level of sales (in units) for the two-month period should Birch Company be indifferent between closing the plant or keeping it open? |
Related questions
Birch Company normally produces and sells 45,000 units of RG-6each month. RG-6 is a small electrical relay used as a componentpart in the automotive industry. The selling price is $26 per unit,variable costs are $16 per unit, fixed manufacturing overhead coststotal $155,000 per month, and fixed selling costs total $36,000 permonth. |
Employment-contract strikesin the companies that purchase the bulk of the RG-6 units havecaused Birch Companyâs sales to temporarily drop to only 12,000units per month. Birch Company estimates that the strikes will lastfor two months, after which time sales of RG-6 should return tonormal. Due to the current low level of sales, Birch Company isthinking about closing down its own plant during the strike, whichwould reduce its fixed manufacturing overhead costs by $46,000 permonth and its fixed selling costs by 11%. Start-up costs at the endof the shutdown period would total $15,000. Because Birch Companyuses Lean Production methods, no inventories are on hand. |
| Required: |
| 1a. | Assuming that the strikescontinue for two months, what is the impact on income by closingthe plant? |
net income in blank by blank in twomonths.
| 1b. | Would you recommend that BirchCompany close its own plant? | ||||
|
| 2. | At what level of sales (in units) for the two-month periodshould Birch Company be indifferent between closing the plant orkeeping it open? |
level of sales blank unit in two months
