Task

Purpose: To enable students in identifying relevant costs and benefits from those that are irrelevant pertaining decisions / alternatives from which the alternative with the greatest net benefit may be chosen in aiding decisions making.

Requirement: Short term decision making

BeBright Co., a wholesaler, sells its products to retailers throughout Kuala Lumpur. The company has adopted a regional structure with each region consisting of 2 sales territories. Each region has its own regional office and a warehouse which distributes the goods directly to the customer. Each sales territory also has an office where the sales and marketing staffs are located. In the Cheras region as well there are 2 sales territories with offices located in Connaught Gardens and Midah Gardens. The budgeted results for the next 3 months are as follows: -

Connaught Midah Total (RM000s) (RM000s) (RM000s) Cost of goods sold 1,600 1,000 2,600

Marketing / salespersons salaries 300 240 540

Sales office rent 150 120 270

Depreciation of sales office equipment 50 40 90

Allocation of warehouse rent 48 24 72

Depreciation of warehouse equipment 38 22 60

Regional & headquarters costs: Avoidable costs 272 186 458

Unavoidable costs 760 340 1,100 Total costs assigned to each location 3,218 1,972 5,190

Reported profit / (loss) 382 (272) 110 Sales 3,600 1,700 5,300

The company is evaluating whether it should discontinue Midah Gardens sales office as it is not profitable. Assuming that the above results are likely to be typical of future quarterly performance, should the company discontinue this sales territory?

Required:

State which of the above costs are relevant and irrelevant. Why? (8 marks)

Analyse the relevant costs related to keeping or discontinuing the Midah Gardens sales office. What should the company do (keep or discontinue Midah Gardens)? (12 marks)

What are TWO (2) qualitative factors that the company should consider in making its final decision? (5 marks)