Birch Company normally produces and sells 40,000 units of RG-6 each month. The selling price is $32 per unit, variable costs are $20 per unit, fixed manufacturing overhead costs total $140,000 per month, and fixed selling costs total $30,000 per month.
The pandemic has caused the companies that purchase the bulk of the RG-6 units to withdraw orders, so Birch Company’s sales temporarily drops to only 10,000 units per month. Birch Company estimates that the effects of pandemic will last for five 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 pandemic, which would reduce its fixed manufacturing overhead costs by $120,000 per month and its fixed selling costs by 80% per month. Start-up costs at the end of the shutdown period would total $18,000, and an additional fixed amount of $30,000 advertising expense is expected to re-boost the sales. Because Birch Company uses Lean Production methods, no inventories are on hand.
What is the financial advantage (disadvantage) if Birch closes its own plant for five months? Show the work process.
Should Birch close the plant for five months?
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