Check my work 4 Problem 12-24 Shutting Down or Continuing to Operate a Plant [LO
ID: 2526114 • Letter: C
Question
Check my work 4 Problem 12-24 Shutting Down or Continuing to Operate a Plant [LO12-2 Birch Company normally produces and sells 41.000 units of RG-6 each month. The selling price is $20 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $195,000 per month, and fixed selling costs total $42,000 per month points 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 vwill 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 strke, 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 $15,000. Because Birch Company uses Lean Production method, no nventories are on hand. Book Prina Required: 1. What is the financial advantage (disadvantage) if Birch closes its own plant for two months? References 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 t open?Explanation / Answer
Solution 1:
Solution 2:
As there is net financial disadvantage of $110,600 of shutting down the plant, therefore plant should be continued.
Solution 3:
Saving in fixed cost on shutdown of plant = ($48,000*2) + ($4,200*2) = $104,400
Additional fixed cost to be incurred on start up = $15,000
Net cost saving on shutdown = $104,400 - $15,000 = $89,400
Contribution per unit = $20 - $10 = $10 per unit
Nos of units at which birch company would be indifferent in shut down of plant and continue the plant = Net cost saving on shutdown / contribution per unit = $89,400 / $10 = 8940 units
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) Financial advantage (Disadvantage) of shutdown (Alternative 2) Revenue $400,000.00 $0.00 -$400,000.00 Costs: Variable cost $200,000.00 $0.00 -$200,000.00 Fixed manufacturing overhead cost $390,000.00 $294,000.00 -$96,000.00 Fixed selling cost $84,000.00 $75,600.00 -$8,400.00 Startup cost at the end of shutdown period $0.00 $15,000.00 $15,000.00 Income / (Loss) -$274,000.00 -$384,600.00 -$110,600.00