Ayeco Ltd, with a central organisation in Ayetown, has three manufacturing units, one is Beetown, the second in Ceetown and the third in Deetown. The company manufactures and sells an air conditioner under the brandname of Ayecool at a price of $200. It is unable to utilise fully its manufacturing capacity.

Summarised profit and loss statements for the year are shown below:

Beetown Ceetown Deetown Total

$000 $000 $000 $000 Cost Direct materials 200 800 400 1400 Direct wages 200 900 350 1450 Production overhead Variable 50 300 150 500 Fixed 200 600 300 1100 Sub-total 650 2600 1200 4450 Selling overhead Variable 25 200 100 325 Fixed 75 250 150 475 Administration overhead 100 450 200 750 Sub-total 850 3500 1650 6000 Central organisation cost 50 200 100 350 Total 900 3700 1750 6350 Profit 100 300 250 650 Sales 1000 4000 2000 The management of the company has to decide whether or not to renew the lease of the property at Beetown, which expires next year. The company has been offered an extension to the lease at an additional cost of $50000 per annum. This situation concerning the lease has been known for some time, so the accountant has collected relevant information to aid the decision. It is estimated that the cost of closing down Beetown would be offset by the surplus obtained by the sale of plant, machinery and stocks.
If Ayeco Ltd does not renew the lease of Beetown property it can:
(i) accept an offer from Zeeco Ltd, a competitor, to take over the manufacture and sales in the Beetown area and pay to Ayeco Ltd a commission of $3 for each unit sold (ii) transfer the output at present made in Beetown to either Ceetown or Deetown; each of these units has sufficient plant capacity to undertake the Beetown output. but additional costs in supervision, salaries, storage and maintenance would be incurred; these additional costs are estimated as amounting yearly to $250000 at Ceetown and $200000 at Deetown If the Beetown sales connections are transferred to either Ceetown or Deetown, it is estimated that additional transport costs would be incurred in delivering to customers in the region of Beetown, and that these would amount respectively to $15 and $20 per unit.
REQUIRED

(a) Present a statement to the board of directors of Ayeco Ltd to show the estimated annual profit which would arise from:
(i} continuing production at all three sites (ii) closing down production at Beetown, and accepting the offer of the sales commission from Zeeco Ltd (iii) transferring Beetown sales to Ceetown (iv) transferring Beetown sales to Deetown

(b) Comment on your statement, indicating any problems which may arise from the various decisions which the board may decide to take ICMA, PS. Part I. Cost Accounting 2, November 1978.