relevent costing

A company manufactures and sells a wide range of products. The products are manufactured in
various locations and sold in a number of quite separate markets. The company’s operations are
organised into five divisions which may supply each other as well as selling on the open market.
The following financial information is available concerning the company for the year just ended:
(£000)
Sales 8,600
Production cost of sales 5,332
Gross profit 3,268
Other expenses 2,532
Net profit 736
An offer to purchase Division 5, which has been performing poorly, has been received by the
company. The gross profit percentage of sales, earned by Division 5 in the year, was half that earned
by the company as whole. Division 5 sales were 10% of total company sales. Of the production
expenses incurred by Division 5, fixed costs were £316,000. Other expenses (i.e. other than
production expenses) incurred by the division totalled £156,000, all of which can be regarded as
fixed. These include £38,000 apportionment of general company expenses which would not be
affected by the decision concerning the possible sale of Division 5.
In the year ahead, if Division 5 is not sold, fixed costs of the division would be expected to increase
by 5% and variable costs to remain at the same percentage of sales. Sales would be expected to
increase by 10%.
If the division is sold, it is expected that some sales of other divisions would be lost. These would
provide a contribution to profits of £20 000 in the year ahead. Also, if the division is sold, the capital
sum received could be invested so as to yield a return of £75,000 in the year ahead.
Required:
(a) Calculate whether it would be in the best interests of the company, based upon the expected
situation in the year ahead, to sell Division 5. (13 marks)
(b) Discuss other factors that you feel should influence the decision. (7 marks)
(c) Calculate the percentage increase in Division 5 sales required in the year ahead (compared with
the current year) for the financial viability of the two alternatives to be the same. (You are to assume
that all other factors in the above situation will remain as forecast for the year ahead.) (5 marks)