The annual flexible budget for a company is as follows: Production capacity 40% 60% 80% 100% Costs: K K K Direct labour 16 000 24 000 32 000 40 000 Direct material 12 000 18 000 24 000 30 000 Production overhead 11 400 12 600 13 800 15 000 Administration overheads 5 800 6 200 6 600 7 000 Selling & distribution overhead 6 200 6 800 7 400 8 000 51 400 67 600 83 800 100 000 Owing to trading difficulties, the company is operating at 50% capacity. Selling prices have had to be lowered to what the directors maintain is an uneconomic level and they are considering whether or not their single factory should be closed down until the trade recession has passed. A market research consultant has advised that in about 12 months' time there is every indication that sales will increase to about 75% of normal capacity and that the revenue to be produced in the second year will be K90 000. The present revenue from sales at 50% capacity will be only K49 500 for a complete year. If the directors decide to close down the factory for a year it is estimated that: a). the present fixed costs would be reduced to K11 000 b). closing down costs like redundancy payments would be K7 500 c). necessary maintenance of plant would cost K1 000 per annum d). on re-opening the factory, the cost of overhauling plant, training and engagement of new personnel would be K4 000. Required: Prepare a statement for the directors, presenting information in such a way as to indicate whether or not it is desirable to close the factory.
The annual flexible budget for a company is as follows: Production capacity 40% 60% 80% 100% Costs: K K K Direct labour 16 000 24 000 32 000 40 000 Direct material 12 000 18 000 24 000 30 000 Production overhead 11 400 12 600 13 800 15 000 Administration overheads 5 800 6 200 6 600 7 000 Selling & distribution overhead 6 200 6 800 7 400 8 000 51 400 67 600 83 800 100 000 Owing to trading difficulties, the company is operating at 50% capacity. Selling prices have had to be lowered to what the directors maintain is an uneconomic level and they are considering whether or not their single factory should be closed down until the trade recession has passed. A market research consultant has advised that in about 12 months' time there is every indication that sales will increase to about 75% of normal capacity and that the revenue to be produced in the second year will be K90 000. The present revenue from sales at 50% capacity will be only K49 500 for a complete year. If the directors decide to close down the factory for a year it is estimated that: a). the present fixed costs would be reduced to K11 000 b). closing down costs like redundancy payments would be K7 500 c). necessary maintenance of plant would cost K1 000 per annum d). on re-opening the factory, the cost of overhauling plant, training and engagement of new personnel would be K4 000. Required: Prepare a statement for the directors, presenting information in such a way as to indicate whether or not it is desirable to close the factory.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:QUESTION FIVE
The annual flexible budget for a company is as follows:
Production capacity
40%
60%
80%
100%
Costs:
K
K
K
Direct labour
16 000
24 000
32 000
40 000
Direct material
12 000
18 000
24 000
30 000
Production overhead
11 400
12 600
13 800
15 000
Administration overheads
5 800
6 200
6 600
7 000
Selling & distribution overhead
6 200
6 800
7 400
8 000
51 400
67 600
83 800
100 000
Owing to trading difficulties, the company is operating at 50% capacity. Selling prices have had to
be lowered to what the directors maintain is an uneconomic level and they are considering whether
or not their single factory should be closed down until the trade recession has passed .
A market research consultant has advised that in about 12 months' time there is every indication
that sales will increase to about 75% of normal capacity and that the revenue to be produced in the
second year will be K90 000. The present revenue from sales at 50% capacity will be only K49 500
for a complete year.
If the directors decide to close down the factory for a year it is estimated that:
a). the present fixed costs would be reduced to K11 000
b). closing down costs like redundancy payments would be K7 500
c). necessary maintenance of plant would cost K1 000 per annum
d). on re-opening the factory, the cost of overhauling plant, training and engagement of new
personnel would be K4 000.
Required:
Prepare a statement for the directors, presenting information in such a way as to indicate whether
or not it is desirable to close the factory.
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