X ltd—a public limited company—has a chain of marketing centres across the country to sell its own products. The directors of the company are confronted with the problem—whether to continue business at Kanpur and Nagpur or to close these units and letting out the premises at an annual rental of Rs. 6,000 for Kanpur and Rs. 8,000 for Nagpur, which have been offered by A Ltd and B Ltd who are engaged in the same type of business as that of X Ltd.

There is no connection between A Ltd and B Ltd and the acceptance of offer of one company does not necessarily involve the acceptance of the other.

The condensed P&L A/c of the two marketing centres for the year ended 31 December 2009 is shown as follows:

The average stock at the cost of the two marketing centres is:
Kanpur: Rs. 30,000.
Nagpur: Rs. 50,000.
If business at either marketing unit is continued, the trading results are expected to remain the same in the year 2009. The company can invest its surplus funds to yield an interest at 5% per annum. It is unlikely that there will be any saving in the head-offi ce-administration costs expecting a reduction in the audit fee and a saving in the travelling expenses of the head offi ce staff at Rs. 200 per marketing unit per annum.
Should, in your opinion as a cost accountant, either or both of the premises be let out at the rents offered. Give reasons for your recommendations.

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Kanpur Nagpur Kanpur Nagpur Rs. Rs. Rs. Rs. Establishment charges 16,200 19,500 Administrative expenses 2,420 3,090 Gross Profit 26,500 32,700 Share of Head-office expenses 4,500 5,500 Net profit 3,380 4,610 26,500 32,700 26,500 32,700