Example 17.4 : Shutdown decisions A Ltd., with a head office in Ayetown, has three manufacturing units. One is in Beetown, the second in Ceetown and the third in Deetown. The company manufactures and sells an air-conditioner under the brand-name of Ayecool at a price of $200. It is unable to utilize fully its manufacturing capacity. Summarized profit and loss statements for the year are shown below. Beetown Ceetown Deetown Total $'000 Cost $'000 $'000 $'000 Direct materials 200 300 400 1,400 Direct wages 200 900 350 1,450 Production O/H : variable 50 300 150 500 fixed 200 600 300 1, 100 Sub-total 650 2,600 1,200 4,450 Selling O/H variable 25 200 100 325 fixed 75 250 150 475 Administration O/H 100 150 200 750 Sub-total 850 3,500 1,650 6,000 Head office costs 50 200 100 350 Total 900 3,700 1,750 6,350 Profit 100 300 250 650 Sales 1,000 4,000 2,000 7,000 The management of the company has to decide whether or not to renew the lease of the property at Beetown, which expires next year, The company has been offered an extension to the lease at an additional cost of $50,000 per annum. This situation concerning the lease has been known for some time, so the accountant has collected relevant information to aid the decision. It is estimated that the cost of closing down Beetown would be offset by the surplus obtained by the sale of plant, machinery and inventories. If A Ltd. does not renew the lease of the Beetown property it has two alternatives. (a) Accept an offer from Zeeco Lid., a competitor, to take over the manufacture and sales in Beetown area and pay to A Lid. a commission of $3 for each unit sold. (b) Transfer the output at present made in Beetown to either Ceetown or Deetown. Each of these units has sufficient plant capacity to undertake the Beetown output but additional costs in supervision, salaries, storage and maintenance would be incurred. These additional costs are estimated as amounting yearly to $250,000 at Ceetown to $200,000 at Deetown. If the Beetown sales are transferred to either Ceetown or Deetown, it is estimated that additional transport costs would be incurred in delivering to customers in the region of Beetown, and that these would amount $15 per unit and $20 per unit respectively. Required Present a statement to the board of directors of A Itd. to show the estimated annual profit which would arise from the following alternatives courses of action. (a) Continuing production at all three sites (b) Closing down production at Beetown and accept the offer from Zeeco Lid. (c) Transferring Beetown sales to Ceetown (d) Transferring Beetown sales to Deetown Comment on your statement, indicating any problems which may arise from the various decisions which the board may decide to take. 17.5