The original budget for the K department of Hilton Ltd for the forthcoming year was as follows:

Budget for forthcoming year- K dept Budgeted sales and production- 30000 units Sales revenue Manufacturing cost:

Material per unit Material A-1 I Material B-1 kg Production labour Variable overhead Fixed manufacturing overhead Non-manufacturing cost Total cost Budgeted net profit for year Per unit of output

$

10.0 2.0 1.5 2.0 1.0 2.0 8.5 1.0 9.5 0.5 Total for 30000 units

$000 300 60 45 60 30 60 255 30 285 15 As part of Hilton's long-term strategic plan, the K department was due to be closed at the end of the forthcoming year. However, rumours of the closure have resulted in the majority of K's labour force leaving the firm, and this has forced the abandonment of the original budget for the department.
The managing director has suggested that the department could be closed down immediately or. by employing contract labour, could be operated to produce 10000 or 20000 units in the year. With the exception of the foreman (see (v) below). the few remaining members of K's production labour force would then be redeployed within the firm.
The following further information is available:
(i) Each hour of contract labour will cost $3.00, and will produce one unit of the product; contract labour would have to be trained at a fixed cost of $20000 (ii) There are 30000 litres of material A in stock; this material has no other use, and any of it not used in department K will have to be disposed of; cost of disposal will be $2000 plus $0.50 per I disposed of ·
(iii) There are 15000 kg of material Bin stock; if the material is not used in department K, then up to 10000 kg could be used in another department to substitute for an equivalent weight of a material which currently costs $1.8 per kg; material B originally cost $1.5 per kg, and its current market price (buying or selling) is $2.0 per kg; cost to Hilton of selling any surplus material B will amount to $1.00 per kg sold (iv) Variable overhead will be 30 per cent higher, per unit produced, than originally budgeted (v) Included in Fixed manufacturing overheads are:

(a) $6000 salary of the departmental foreman

(b) $7000 depreciation of the machine used in the department If the department is closed immediately the foreman. who will otherwise return at the end of the year, will be asked to retire early and paid $2000 compensation for agreeing to this; the only machine used in the department originally cost $70000 and could currently be sold for $43000; this sales value will reduce to $40000 at the end of the year and, if used for any production during the year, will decrease by a further $500 per 1 000 units produced (vi) All other cost included in Fixed manufacturing overhead and all Non-manufacturing costs is apportionment of general overhead, none of which will be altered by any decision concerning the K department (vii) The sales manager suggests that a sales volume of 10000 units could be achieved if the unit sales price were $9-.00; a sales volume of 20000 units would be achieved if the sales price per unit were reduced to $8, and an advertising campaign costing $15000 were undertaken REQUIRED

(a) Advise Hilton Ltd of its best course of action regarding department K. presenting data in tabular form

(b) For each of the following separate circumstances, show how the advice given in

(a) above is altered:
(i) immediate closure of department K would enable its factory space to be rented out for 1 year at a rental of $8000 (ii) the quoted level of efficiency of the contract labour is the average for production of the first 5000 units, and any additional production would reflect the effect of the 90 per cent learning curve which will be experienced Show also the revised labour cost Ignore taxation, and the time value of money.
ACCA, PE, Section 2, Paper 14, Accounting 5, Management Accounting, June 1981.