Note: This type of decision is similar to dropping a product line.)Birch Company normally produces and sells 30,000 units of RG-6 each month. RG-6 is a small electricalrelay used as a component part in the automotive industry. The selling price is $22 per unit, variable costsare $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 causedBirch Company’s sales to temporarily drop to only 8,000 units per month. Birch Company estimatesthat the strikes will last for two months, after which time sales of RG-6 should return to normal. Due tothe current low level of sales, Birch Company is thinking about closing down its own plant during thestrike, which would reduce its fixed manufacturing overhead costs by $45,000 per month and its fixedselling costs by 10%. Start-up costs at the end of the shutdown period would total $8,000. Because BirchCompany uses Lean Production methods, no inventories are on hand.Required:1. Assuming that the strikes continue for two months, would you recommend that Birch Company closeits own plant? Explain. Show computations.2. At what level of sales (in units) for the two-month period should Birch Company be indifferentbetween closing the plant or keeping it open? Show computations. (Hint: This is a type of break-evenanalysis, except that the fixed cost portion of your break-even computation should include only thosefixed costs that are relevant [i.e., avoidable] over the two-month period.)
Note: This type of decision is similar to dropping a product line.)
Birch Company normally produces and sells 30,000 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 $22 per unit, variable costs
are $14 per unit, fixed
$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
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 $45,000 per month and its fixed
selling costs by 10%. Start-up costs at the end of the shutdown period would total $8,000. Because Birch
Company uses Lean Production methods, no inventories are on hand.
Required:
1. Assuming that the strikes continue for two months, would you recommend that Birch Company close
its own plant? Explain. Show computations.
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? Show computations. (Hint: This is a type of break-even
analysis, except that the fixed cost portion of your break-even computation should include only those
fixed costs that are relevant [i.e., avoidable] over the two-month period.)
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