The annual flexible budget for Rodo Limited, is as follows:

Depressed trading conditions have caused management to consider whether the factory should be closed down temporarily and re-opened to coincide with the anticipated upsurge in-demand expected sometime in the following year. Current production output is only 50% of capacity with a forecast annual sales revenue of £250 000 at that level of production. Informed sources forecast that in the twelve months following the re-opening date, sales could run at 80% of capacity and at an increased selling price per unit which would generate a total sales revenue of £480 000.
Closure of the factory for twelve months would, it is estimated:
(1) reduce the fixed element of overhead expenses to £25 000 per annum;
(2) incur plant maintenance costs of £4 000 per annum;
(3) entail closing down costs (e.g. redundancy payments) of £8 000.
Re-opening the factory after such a long period of closure would involve costs (e.g. training new personnel) which are estimated at £6 000.

Required:

(a) A financial statement showing the variable costs, contribution, fixed costs, and profit or loss at 50% and 80% levels of activity. (16 marks)

(b) A statement of the costs which would be incurred if the factory were closed and subsequently re-opened. (3 marks)

(c) Advise the company, with reasons, as to the course of action they should take, on the basis of the information given.

Transcribed Image Text:

Level of activity Costs 40% 60% 75% 100% 000 000 000 000 direct labour 104 156 195 260 direct material 64 96 120 160 production overhead 46 54 60 70 administration, selling, and distribution overhead 28 32 35 40 242 338 410 530