Question
Birch Company normally produces and sells 30,000 units of RG-6 each month. The selling price is $22 per unit, variable costs are $14 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total $30,000 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 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 its own plant during the strike, which would reduce fixed manufacturing overhead costs by $45,000 per month and fixed selling costs by 10%. Start-up costs at the end of the shutdown would total $8,000. Because Birch Company uses Lean Production methods, no inventories are on hand.
What is the financial disadvantage if Birch closes its own plant for two months?
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 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 its own plant during the strike, which would reduce fixed manufacturing overhead costs by $45,000 per month and fixed selling costs by 10%. Start-up costs at the end of the shutdown would total $8,000. Because Birch Company uses Lean Production methods, no inventories are on hand.
What is the financial disadvantage if Birch closes its own plant for two months?
Answers
Answered by
GPT-4o mini
To evaluate the financial disadvantage if Birch Company closes its plant for two months, we'll analyze the comparative financial effects of operating the plant versus closing it during this period.
1. **Current Monthly Costs and Revenues when operating**:
- Sales at 8,000 units:
- Selling Price per Unit: $22
- Variable Costs per Unit: $14
- Contribution Margin per Unit: $22 - $14 = $8
**Total Contribution for 8,000 units**:
- Contribution from sales = 8,000 units * $8 = $64,000
2. **Fixed Costs**:
- Fixed Manufacturing Overhead Costs: $150,000
- Fixed Selling Costs: $30,000
- Total Fixed Costs: $150,000 + $30,000 = $180,000
**Total Costs when Operating:**
- Total Cost = Variable Costs + Fixed Costs
- Variable Cost for 8,000 units = 8,000 units * $14 = $112,000
- Total Costs when operating = $112,000 + $180,000 = $292,000
**Net Income when Operating**:
- Net Income = Contribution from sales - Total Costs
- Net Income = $64,000 - $292,000 = -$228,000
3. **Costs if the Plant is Closed**:
- Saved Fixed Costs during shutdown:
- Fixed Manufacturing Overhead Costs reduced by $45,000 = $150,000 - $45,000 = $105,000
- Fixed Selling Costs reduced by 10% = $30,000 - (10% of $30,000) = $30,000 - $3,000 = $27,000
- Total Fixed Costs during shutdown = $105,000 + $27,000 = $132,000
- Start-up cost of $8,000 after shutdown.
**Total Costs if Closed**:
- Total Costs when closed = Total Fixed Costs during shutdown + Start-up cost
- Total Costs when closed = $132,000 + $8,000 = $140,000
4. **Comparison**:
- Net loss when operating: -$228,000
- Loss when closed: -$140,000
5. **Financial Disadvantage**:
- Difference = Net loss when operating - Loss when closed
- Financial Disadvantage = -$228,000 - (-$140,000) = -$88,000
In summary, if Birch Company closes its plant for two months, it will face a financial disadvantage of **$88,000** compared to keeping it open during the sales downturn. Closing the plant seems to be the better option financially.
1. **Current Monthly Costs and Revenues when operating**:
- Sales at 8,000 units:
- Selling Price per Unit: $22
- Variable Costs per Unit: $14
- Contribution Margin per Unit: $22 - $14 = $8
**Total Contribution for 8,000 units**:
- Contribution from sales = 8,000 units * $8 = $64,000
2. **Fixed Costs**:
- Fixed Manufacturing Overhead Costs: $150,000
- Fixed Selling Costs: $30,000
- Total Fixed Costs: $150,000 + $30,000 = $180,000
**Total Costs when Operating:**
- Total Cost = Variable Costs + Fixed Costs
- Variable Cost for 8,000 units = 8,000 units * $14 = $112,000
- Total Costs when operating = $112,000 + $180,000 = $292,000
**Net Income when Operating**:
- Net Income = Contribution from sales - Total Costs
- Net Income = $64,000 - $292,000 = -$228,000
3. **Costs if the Plant is Closed**:
- Saved Fixed Costs during shutdown:
- Fixed Manufacturing Overhead Costs reduced by $45,000 = $150,000 - $45,000 = $105,000
- Fixed Selling Costs reduced by 10% = $30,000 - (10% of $30,000) = $30,000 - $3,000 = $27,000
- Total Fixed Costs during shutdown = $105,000 + $27,000 = $132,000
- Start-up cost of $8,000 after shutdown.
**Total Costs if Closed**:
- Total Costs when closed = Total Fixed Costs during shutdown + Start-up cost
- Total Costs when closed = $132,000 + $8,000 = $140,000
4. **Comparison**:
- Net loss when operating: -$228,000
- Loss when closed: -$140,000
5. **Financial Disadvantage**:
- Difference = Net loss when operating - Loss when closed
- Financial Disadvantage = -$228,000 - (-$140,000) = -$88,000
In summary, if Birch Company closes its plant for two months, it will face a financial disadvantage of **$88,000** compared to keeping it open during the sales downturn. Closing the plant seems to be the better option financially.