Principles of incremental revenue and relevant costs, Cost Accounting

Shortflower Ltd currently publishes, prints and distributes a range of catalogues and instruction manuals. The management has now decided to discontinue printing and distribution and concentrate solely on publishing. Longplant Ltd will print and distribute the range of catalogues and instruction manuals on behalf of Shortflower Ltd commencing either at June 30 or November 30. Longplant Ltd will receive $65,000 per month for a contract which will commence either at June 30 or November 30.

The results of Shortflower Ltd for a typical month are as follows:

 

Publishing

Printing

Distribution

 

$'000

$'000

$'000

Salaries and wages

28.0

18.0

4.0

Materials and supplies

5.5

31.0

1.1

Occupancy costs

7.0

8.5

1.2

Depreciation

0.8

4.2

0.7

Other information has been gathered relating to the possible closure proposals:

  1. Two specialist staff from printing will be retained at their present salary of $1,500 each per month in order to fulfill a link function with Longplant Ltd. One further staff member will be transferred to publishing to fill a staff vacancy through staff turnover, anticipated in July. This staff member will be paid at his present salary of $1,400 per month which is $100 more than that of the staff member who is expected to leave. On closure all other printing and distribution staff will be made redundant and paid an average of two months redundancy pay.
  2. The printing department has a supply of materials (already paid for) which cost $18,000 and which will be sold to Longplant Ltd for $10,000 if closure takes place on June 30. Otherwise the material will be used as part of the July printing requirements. The distribution department has a contract to purchase pallets at a cost of $500 per month for July and August. A cancellation clause allows for non-delivery of the pallets for July and August for a one-off payment of $300. Non-delivery for August only will require a payment of $100. If the pallets are taken from the supplier Longplant Ltd has agreed to purchase them at a price of $380 for each month's supply which is available. Pallet costs are included in the distribution material and supplies cost stated for a typical month,
  3. Company expenditure on apportioned occupancy costs to printing and distribution will be reduced by 15% per month if printing and distribution departments are closed. At present, 30% of printing and 25% of distribution occupancy costs are directly attributable costs which are avoidable on closure, whilst the remainder is apportioned costs.
  4. Closure of the printing and distribution departments will make it possible to sub-let part of the building for a monthly fee of $2,500 when space is available.
  5. Printing plant and machinery has an estimated net book value of $48,000 at June 30. It is anticipated that it will be sold at a loss of $21,000 on June 30. If sold on November 30 the prospective buyer will pay $25,000.
  6. The net book value of distribution vehicles at June 30 is estimated as $80,000. They could be sold to the original supplier at $48,000 on June 30. The original supplier would purchase the vehicles on November 30 for a price of $44,000.

Required:

Using the principles of incremental revenue and relevant costs, prepare a summary to show whether Shortflower Ltd should close the printing and distribution departments on financial grounds on June 30 or November 30. Show all workings.

Posted Date: 2/14/2013 7:15:49 AM | Location : United States







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