S & P Products plc purchases a range of good-quality gift and household products from around the world; it then sells these products through ‘mail order’ or retail outlets. The company receives ‘mail orders’ by post, telephone and Internet. Retail outlets are either department stores or S & P Products plc’s own small shops. The company started to set up its own shops after a recession in the early 1990s and regards them as the flagship of its business; sales revenue has gradually built up over the last 10 years. There are now 50 department stores and 10 shops. The company has made good profits over the last few years but recently trading has been difficult. As a consequence, the management team has decided that a fundamental reappraisal of the business is now necessary if the company is to continue trading. Meanwhile the budgeting process for the coming year is proceeding. S & P Products plc uses an activity-based costing (ABC) system and the following estimated cost information for the coming year is available:

Staffing, rental and service costs for each of S & P Products plc’s own shops cost on average £300,000 a year.

The total number of orders through the whole ‘mail order’ business for the coming year is expected to be 80,000. The maintenance of the Internet link is estimated to cost £80,000 for the coming year. The following additional information for the coming year has been prepared:

Expected head office and warehousing costs for the coming year:............................................................ £Warehouse......................... 2,750,000IT............................................. 550,000Administration...................... 750,000Personnel.............................. 300000............................................ 4,350,000

Required:a) 1) Prepare calculations that will show the expected profitability of the different types of sales outlet for the coming year. (13 marks)2) Comment briefly on the results of the figures you have prepared. (3 marks)

b) In relation to the company’s fundamental reappraisal of its business,1) discuss how helpful the information you have prepared in (a) is for this purpose and how it might be revised or expanded so that it is of more assistance; (7 marks)2) advise what other information is needed in order to make a more informed judgement. (7 marks) (Total = 30 marks)