Problem 12-24 Shutting Down or Continuing to Operate a Plant [LO12-2] Birch Comp
ID: 2528412 • Letter: P
Question
Problem 12-24 Shutting Down or Continuing to Operate a Plant [LO12-2] Birch Company normally produces and sells 44,000 units of RG-6 each month. The selling price is $30 per unit, variable costs are $10 per unit, fixed manufacturing overhead costs total $155,000 per month, and fixed selling costs total $34,000 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 11,000 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 $44,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $16,000. 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 2Required 3 What is the financial advantage (disadvantage) if Birch closes its own plant for two months?Explanation / Answer
Answer
If not closed/Shut down
If Shut down
based on 22000 units [11000 units each month]
2 month cost
Sales Revenue
$ 6,60,000.00
$ -
Variable cost
$ 2,20,000.00
$ -
Fixed manufacturing overhead
$ 3,10,000.00
$ 2,22,000.00
Fixed Selling Overhead
$ 68,000.00
$ 61,200.00
Start Up Cost
$ 16,000.00
Net Income (Loss)
$ 62,000.00
$ (2,99,200.00)
Financial Disadvantage would be $299,200
Since there is a financial DISadvantage, PLANT SHOULD NOT BE CLOSED FOR 2 months.
Point of indifference will be that point where Net Income under both alternative is equal.
Let the number of units be ‘x’
Net Benefit if not closed = Net Benefit if shut down
2(30x - 10x)-310000-68000=-222000-61200-16000
60x - 20x - 378000 = - 299200
40x = 378000 - 299200
x = 78800 / 40
x = 1970
Unit sales required for Birch to be indifferent = 1970 units for 2 months
If not closed/Shut down
If Shut down
based on 22000 units [11000 units each month]
2 month cost
Sales Revenue
$ 6,60,000.00
$ -
Variable cost
$ 2,20,000.00
$ -
Fixed manufacturing overhead
$ 3,10,000.00
$ 2,22,000.00
Fixed Selling Overhead
$ 68,000.00
$ 61,200.00
Start Up Cost
$ 16,000.00
Net Income (Loss)
$ 62,000.00
$ (2,99,200.00)