Accounting

Fudge Ltd operates at three factory sites producing a closely related product range. The 20X4 budget for Fudge Ltd’s operations is as follows:

                                            Croydon      Luton        Southend

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                                                 £000        £000        £000

Costs:

Variable                               475              2,200       1,000

Fixed (site)                          375              1,300           650

Fixed (central)                       50                 200         100

Sales                                  1,000             4,000        2,000

Profit                                 100                   300           250

The lease of the Croydon site expires at the end of 20X4. Four alternative options have been identified for the 20X5 operations:

1. Renew the Croydon site lease at an additional annual rental of £50,000.

2. Shut the Croydon site and franchise Croydon production to another manufacturer at a 1.5 per cent commission on sales.

3. Shut the Croydon site and switch production to Luton; this would involve an additional £250,000 per year fixed costs at Luton and additional transport costs on production transferred amounting to 7.5 per cent of sales.

4. Shut down the Croydon site and switch production to Southend; this would involve additional fixed costs of £200,000 per year at Southend and additional transport costs on production transferred amounting to 10 per cent of sales.

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