RG produces a specialised building tool in three factories throughout Ireland. The output produced in the Dublin, Cork and Belfast factories per year is 88 000, 52 800, and 35 200 units, respectively. This level of output represents the typical level of output. The specialised building tool is sold to customers for €8 per unit. The profit or loss for the last financial year is shown below:

As a result of the loss showing in the Belfast factory, RG is considering various options as follows:

Option 1:

RG would make no changes and keep all factories open.

Option 2:

RG would close the Belfast factory. Under this option, the production in the other two factories (Dublin and Cork) would remain unchanged.

Option 3:

RG would close the Belfast factory but move some of the Belfast production to the Cork factory and outsource some additional output. Under this option the Cork factory would take 20% of the existing Belfast production (that is, 7 040 units), and outsource 20 000 units from an external supplier outside Ireland. RG can purchase 20 000 units from the external supplier for €6 per unit. Production in the Dublin factory would remain unchanged.

The following additional information is available:

1. The cost of sales consists of the variable costs to produce the building tool, including direct materials (€1 per unit) and specialised direct labour required to build the tool (€2 per unit).
2. The factory and administration costs are fixed costs associated specifically with each factory.
3. The depreciation of factory equipment (€120 000) is a corporate level cost that is allocated to the factories proportionally based on the output produced.

Required

1. APPLY relevant cost principles to evaluate which option (1, 2 or 3) RG should choose based on financial factors only. As part of your answer you should clearly identify the relevant revenues and costs and clearly state any assumptions that you make. Show all workings.
2. EXPLAIN two important qualitative factors that are also relevant to options 2 and 3 each (that is, four qualitative factors total).
    

Transcribed Image Text:

Sales (€) Cost of sales (€) Gross profit (€) Factory costs (€) Administration costs (€) Dublin 704 000 264 000 440 000 220 000 84 000 Depreciation of factory equipment (€) 60 000 364 000 76 000 Cork 422 400 158 400 264 000 112 000 54 000 36 000 202 000 62 000 Belfast 281 600 105 600 176 000 104 000 50 000 24 000 178 000 (2 000) Total 1 408 000 528 000 880 000 436 000 188 000 120 000 Total operating costs Operating profit/loss 744 000 136 000 Sales (€) Cost of sales (€) Gross profit (€) Factory costs (€) Administration costs (€) Dublin 704 000 264 000 440 000 220 000 84 000 Depreciation of factory equipment (€) 60 000 364 000 76 000 Cork 422 400 158 400 264 000 112 000 54 000 36 000 202 000 62 000 Belfast 281 600 105 600 176 000 104 000 50 000 24 000 178 000 (2 000) Total 1 408 000 528 000 880 000 436 000 188 000 120 000 Total operating costs Operating profit/loss 744 000 136 000

Answer rating: 100% (QA)

Answer The answer provided below has been developed in a clear step by step manner 1 Explain Relevant cost Principles iRelevant cost is a phrase used ... View the full answer