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?
the answer is not 88,000
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?
the answer is not 88,000
Answers
GPT-4o mini
To analyze the financial impact of closing Birch Company's plant for two months, let's break down the contribution margin, fixed costs, and potential savings or losses from closing the plant and compare the alternatives.
### Normal Production Scenario
1. **Monthly Selling Price:** $22
2. **Monthly Variable Costs:** $14
3. **Contribution Margin per Unit:** \(22 - 14 = 8\)
4. **Normal Monthly Sales Volume:** 30,000 units
**Total Contribution Margin (Normal):**
- Contribution Margin = \(30,000 \text{ units} \times 8 = 240,000\)
5. **Fixed Costs:**
- Fixed Manufacturing Overhead Costs: $150,000 per month
- Fixed Selling Costs: $30,000 per month
- Total Fixed Costs = \(150,000 + 30,000 = 180,000\)
6. **Monthly Profit Without Shutdown (Normal):**
- Total Contribution Margin - Total Fixed Costs = \(240,000 - 180,000 = 60,000\)
### Current Scenario (Sales Drop)
1. **Current Monthly Sales Volume:** 8,000 units
2. **Contribution Margin at Reduced Sales:**
- Contribution Margin = \(8,000 \text{ units} \times 8 = 64,000\)
### Shutdown Scenario (For 2 Months)
1. **Reduced Fixed Costs During Shutdown:**
- Fixed Manufacturing Overhead Costs: \(150,000 - 45,000 = 105,000\)
- Fixed Selling Costs: \(30,000 \times 90\% = 27,000\) (10% reduction)
- Total Fixed Costs = \(105,000 + 27,000 = 132,000\)
2. **Total Costs During Shutdown Including Start-Up Costs:**
- Fixed Costs for 2 Months = \(132,000 \times 2 = 264,000\)
- Start-Up Costs = $8,000
- Total Costs During Shutdown = \(264,000 + 8,000 = 272,000\)
### Profit (Loss) During Shutdown
1. **Contribution Margin for 2 Months (Sales Volume of 8,000 per month):**
- Total Contribution Margin for 2 Months = \(64,000 \times 2 = 128,000\)
2. **Profit (Loss) Calculation During Shutdown:**
- Total Contribution Margin - Total Costs = \(128,000 - 272,000 = -144,000\)
### Financial Disadvantage of Closing the Plant
1. **Profit if the plant is not closed for 2 months:**
- Total Contribution Margin for 2 Months (At reduced sales of 8,000) = 128,000
- Total Fixed Costs (unchanged): \(180,000 \times 2 = 360,000\)
- Profit if not closed = \(128,000 - 360,000 = -232,000\)
2. **Financial Disadvantage of Closing the Plant:**
- If the plant is closed: Loss of \( -144,000\)
- If the plant is not closed: Loss of \( -232,000\)
- Financial Disadvantage = \( -144,000 - (-232,000) = 88,000\)
Despite verifying the calculations leading to a potential financial disadvantage of **$88,000**, if you need an alternative perspective or finding a different line of reasoning to get a result for the given scenario, please feel free to share further constraints or considerations!
### Normal Production Scenario
1. **Monthly Selling Price:** $22
2. **Monthly Variable Costs:** $14
3. **Contribution Margin per Unit:** \(22 - 14 = 8\)
4. **Normal Monthly Sales Volume:** 30,000 units
**Total Contribution Margin (Normal):**
- Contribution Margin = \(30,000 \text{ units} \times 8 = 240,000\)
5. **Fixed Costs:**
- Fixed Manufacturing Overhead Costs: $150,000 per month
- Fixed Selling Costs: $30,000 per month
- Total Fixed Costs = \(150,000 + 30,000 = 180,000\)
6. **Monthly Profit Without Shutdown (Normal):**
- Total Contribution Margin - Total Fixed Costs = \(240,000 - 180,000 = 60,000\)
### Current Scenario (Sales Drop)
1. **Current Monthly Sales Volume:** 8,000 units
2. **Contribution Margin at Reduced Sales:**
- Contribution Margin = \(8,000 \text{ units} \times 8 = 64,000\)
### Shutdown Scenario (For 2 Months)
1. **Reduced Fixed Costs During Shutdown:**
- Fixed Manufacturing Overhead Costs: \(150,000 - 45,000 = 105,000\)
- Fixed Selling Costs: \(30,000 \times 90\% = 27,000\) (10% reduction)
- Total Fixed Costs = \(105,000 + 27,000 = 132,000\)
2. **Total Costs During Shutdown Including Start-Up Costs:**
- Fixed Costs for 2 Months = \(132,000 \times 2 = 264,000\)
- Start-Up Costs = $8,000
- Total Costs During Shutdown = \(264,000 + 8,000 = 272,000\)
### Profit (Loss) During Shutdown
1. **Contribution Margin for 2 Months (Sales Volume of 8,000 per month):**
- Total Contribution Margin for 2 Months = \(64,000 \times 2 = 128,000\)
2. **Profit (Loss) Calculation During Shutdown:**
- Total Contribution Margin - Total Costs = \(128,000 - 272,000 = -144,000\)
### Financial Disadvantage of Closing the Plant
1. **Profit if the plant is not closed for 2 months:**
- Total Contribution Margin for 2 Months (At reduced sales of 8,000) = 128,000
- Total Fixed Costs (unchanged): \(180,000 \times 2 = 360,000\)
- Profit if not closed = \(128,000 - 360,000 = -232,000\)
2. **Financial Disadvantage of Closing the Plant:**
- If the plant is closed: Loss of \( -144,000\)
- If the plant is not closed: Loss of \( -232,000\)
- Financial Disadvantage = \( -144,000 - (-232,000) = 88,000\)
Despite verifying the calculations leading to a potential financial disadvantage of **$88,000**, if you need an alternative perspective or finding a different line of reasoning to get a result for the given scenario, please feel free to share further constraints or considerations!