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    Problem 13-19: © The Mcgraw-Hill Companies, Inc., 2010. All Rights Reserved. 746 Managerial Accounting, 13Th Edition

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    Laphat Piriyakiar
    The document analyzes whether a company should close one of its plants for two months or continue operating at a reduced level. It considers the contribution margin and fixed costs avoided if closed, and calculates that closing would result in a $40,000 greater loss over two months than continuing at a reduced level of 8,000 units per month. Continuing operation also avoids potential loss of goodwill from customers.

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    Problem 13-19: © The Mcgraw-Hill Companies, Inc., 2010. All Rights Reserved. 746 Managerial Accounting, 13Th Edition

    Uploaded by

    Laphat Piriyakiar
    37 views3 pages
    The document analyzes whether a company should close one of its plants for two months or continue operating at a reduced level. It considers the contribution margin and fixed costs avoided if closed, and calculates that closing would result in a $40,000 greater loss over two months than continuing at a reduced level of 8,000 units per month. Continuing operation also avoids potential loss of goodwill from customers.

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    The document analyzes whether a company should close one of its plants for two months or continue operating at a reduced level. It considers the contribution margin and fixed costs avoided if closed, and calculates that closing would result in a $40,000 greater loss over two months than continuing at a reduced level of 8,000 units per month. Continuing operation also avoids potential loss of goodwill from customers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    37 views3 pages

    Problem 13-19: © The Mcgraw-Hill Companies, Inc., 2010. All Rights Reserved. 746 Managerial Accounting, 13Th Edition

    Uploaded by

    Laphat Piriyakiar
    The document analyzes whether a company should close one of its plants for two months or continue operating at a reduced level. It considers the contribution margin and fixed costs avoided if closed, and calculates that closing would result in a $40,000 greater loss over two months than continuing at a reduced level of 8,000 units per month. Continuing operation also avoids potential loss of goodwill from customers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Problem 13-19 (45 minutes)

    1. Product RG-6 has a contribution margin of $8 per unit ($22 $14 = $8).
    If the plant closes, this contribution margin will be lost on the 16,000
    units (8,000 units per month 2 months) that could have been sold
    during the two-month period. However, the company will be able to
    avoid some fixed costs as a result of closing down. The analysis is:
    Contribution margin lost by closing the plant for
    two months ($8 per unit 16,000 units) ......... $(128,000)
    Costs avoided by closing the plant for two months:
    Fixed manufacturing overhead cost ($45,000
    per month 2 months = $90,000)............... $90,000
    Fixed selling costs ($30,000 per month 10%
    2 months)............................................... 6,000 96,000
    Net disadvantage of closing, before start-up
    costs............................................................ (32,000)
    Add start-up costs............................................ 8,000
    Disadvantage of closing the plant ...................... $ (40,000)
    No, the company should not close the plant; it should continue to
    operate at the reduced level of 8,000 units produced and sold each
    month. Closing will result in a $40,000 greater loss over the two-month
    period than if the company continues to operate. An additional factor is
    the potential loss of goodwill among the customers who need the 8,000
    units of RG-6 each month. By closing down, the needs of these
    customers will not be met (no inventories are on hand), and their
    business may be permanently lost to another supplier.

    The McGraw-Hill Companies, Inc., 2010. All rights reserved.


    746 Managerial Accounting, 13th Edition
    Problem 13-19 (continued)
    Alternative Solution:
    Difference:
    Net
    Operating
    Plant Income
    Kept Plant Increase or
    Open Closed (Decrease)
    Sales (8,000 units $22 per
    unit 2) ........................... $ 352,000 $ 0 $(352,000)
    Variable expenses (8,000 units
    $14 per unit 2) ............ 224,000 0 224,000
    Contribution margin .............. 128,000 0 (128,000)
    Less fixed costs:
    Fixed manufacturing
    overhead costs ($150,000
    2) ............................... 300,000 210,000 90,000
    Fixed selling costs
    ($30,000 2).................. 60,000 54,000 * 6,000
    Total fixed costs.................... 360,000 264,000 96,000
    Net operating loss before
    start-up costs..................... (232,000) (264,000) (32,000)
    Start-up costs ....................... 0 (8,000) (8,000)
    Net operating loss ................. $(232,000) $(272,000) $ (40,000)
    * $30,000 90% = $27,000 2 = $54,000

    The McGraw-Hill Companies, Inc., 2010. All rights reserved.


    Solutions Manual, Chapter 13 747
    Problem 13-19 (continued)
    2. Birch Company will not be affected at a level of 11,000 total units sold
    over the two-month period. The computations are:
    Cost avoided by closing the plant for two months
    (see above) ....................................................... $96,000
    Less start-up costs................................................ 8,000
    Net avoidable costs............................................... $88,000
    Net avoidable costs $88,000
    = = 11,000 units
    Per unit contribution margin $8 per unit
    Verification:
    Operate at
    11,000
    Units for Close for
    Two Two
    Months Months
    Sales (11,000 units $22 per unit) .......... $ 242,000 $ 0
    Variable expenses (11,000 units $14
    per unit).............................................. 154,000 0
    Contribution margin ................................ 88,000 0
    Fixed expenses:
    Manufacturing overhead ($150,000 and
    $105,000, 2).................................. 300,000 210,000
    Selling ($30,000 and $27,000, 2)........ 60,000 54,000
    Total fixed expenses ............................... 360,000 264,000
    Start-up costs......................................... 0 8,000
    Total costs ............................................. 360,000 272,000
    Net operating loss................................... $(272,000) $(272,000)

    The McGraw-Hill Companies, Inc., 2010. All rights reserved.


    748 Managerial Accounting, 13th Edition

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