The Southern Division of the Basix Corporation makes and sells tables and beds.

The Southern Division of the Basix Corporation makes and sells tables and beds. The following estimated revenue and cost information from the division for the year ending on 31 December 2002:
4000 Tables
(Amount in £) 5000 Beds
(Amount in £) Total
(Amount in £)

Revenues
500,000
1,000,000
1,500,000
Variable direct materials and direct manufacturing labour cost 300,000 525,000 825,000

Depreciation on equipment used exclusively by each product line 42,000 58,000 100,000
Marketing and distribution cost
70,000 135,000 205,000
Fixed general administration costs of the division allocated to product lines on the basis of revenues 110,000 220,000 330,000
Allocated corporate office costs allocated to product lines on the basis of revenues 50,000 100,000 150,000
TOTAL COSTS
572,000 1,038,000 1,610,000
OPERATING INCOME/(LOSS) (72,000) (38,000) (110,000)

 

The following are the other information relevant for the company:

1. The selling price for Table is £125 per unit. The selling price for Bed is £200 per unit.
2. The variable direct material and direct manufacturing labour costs for Table is £75 per unit and £105 per unit for Bed.
3. Marketing and distribution cost for Tables which is £70,000 consists of £40,000 fixed and the balance £30,000 is for shipment which is £750 per shipment for 40 shipments. One shipment can carry 100 Tables.
4. Marketing and distribution cost for Beds which is £135,000 consists of £60,000 fixed and the balance £75,000 is for shipment which is £750 per shipment for 100 shipments. One shipment can carry 50 beds.
5. Fixed marketing and distribution cost of a product line can be avoided if the line is discontinued.
6. On 1 January 2002, the equipment has a book value of £100,000 and zero disposal value. Any equipment not used will remain idle.
7. Fixed general administration costs of the division and corporate office costs will not change if sales of individual product lines are increased or decreased or if the product lines are added or dropped.

Required: (Consider each requirement separately and assume no connection of one requirement with the other)

1. On the basis of financial considerations alone, should the Southern Division discontinue the Tables product line, assuming the released facilities remain idle? Demonstrate your decision with the help of calculation and notes as a part of your answer.

2. What would be the effect on Southern Division’s operating income if it were to sell 2,000 more tables? Assume that to do so the division would have to acquire additional equipment costing £21,000 with a one-year useful life and zero terminal disposal value. Assume further that the fixed marketing and distribution costs would not change but that the number of shipments would increase proportionately. Demonstrate your decision with the help of calculation and notes as a part of your answer.

 

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