Permanent abandonment of premises, Managerial Accounting


A company may find it more profitable to concentrate its output in some factories by closing down others.  The decision, in this instance, is made on the basis of incremental costs and will depend on that combination of resources which yields the greater overall group profit. The permanent closure of a factory saves fixed cost expenditure and also frees capital (by the sale of assets) for alternative investment, as well as providing the opportunity to take advantage of low marginal costs elsewhere. It is possible that the sale of freehold land and buildings could provide considerable investment funds free of interest which would make the abandonment particularly attractive. This has been demonstrated effectively by asset stripping following a successful takeover.

There may be a high social cost in a factory closure which is difficult to evaluate, but in any case it will be borne by the whole community rather than the individual manufacturer. A growing awareness of the social consequences which follow factory closures may persuade politicians that the cost to the community represents a hidden subsidy to the profits of an individual company. A tax or other deterrent for such cases in the future would be an additional cost of abandonment decisions and so make it relatively less profitable to close a factory.

Posted Date: 12/5/2012 7:47:47 AM | Location : United States

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