B.4 Clarion plc is a manufacturer of specialist sports equipment and has three divisions. The Division Premier' manufactures and sells football shirts. Division 'Championship manufactures and sells football boots. Division 'Elite' manufactures and sells football gifts. The 'Elite' division has recently been struggling to make profits and the management of Clarion are considering whether they should close the division. The company is considering a possible replacement division which may be ready in one year's time, which caters for the cricket equipment market. To support the management of Clarion's consideration, the financial controller has prepared the following budget statement of revenues and costs for the forthcoming year. Division Premier Championship Elite Selling Price 30.00 55.00 12.00 Production costs: Materials per unit 10.50 15.00 7.50 Labour per unit 7.50 12.00 6.00 18.00 27.00 13.50 Contribution per unit 12.00 28.00 -1.50 The expected annual sales (in units) 75,000 90,000 18,000 Key points for consideration: 1. As Clarion sells products from each division to some customers it has been estimated that if the Elite division was closed both the Premier and Championship divisions will lose 5% of their sales. 2. The redundancy costs for staff currently working in the Elite division are estimated at 90,000. If Clarion waited one year it is forecast that the staff would be recruited for the new division and there would be no redundancies. The cost of training them in the new division has been estimated at 12,000. 3. The materials costs relating to the Elite division activity in the year ahead would be saved if the division was closed immediately. 4. If the Elite division was closed immediately the office and factory would be offered for another use, generating income of 20,000. CONTINUED 7 MSINOOBS 2020/21 MSINO056: Management Accounting for Engineers 5. The Product supervisor on a salary of 40,000 per annum splits her time across all three divisions and it is estimated that she spends 20% of her time in the Elite division. It is expected that she would continue in the event of the Elite division being closed. 6. Clarion benefits from generous discounts from suppliers due to the volume of business that are generated across the three divisions. If the Elite division is closed it is estimated that the materials costs for both the Premier and Championship divisions will each increase by 1.5%. 7. The manager of the Elite division has been working on a deal for a number of months which might generate additional sales to those budgeted based on a special international women's football event. The additional sales would generate an additional 5,000 units at an increased selling price of 14. He has arranged a discount of 30% on the material cost per unit. Required: a. Using the information provided, prepare a relevant cost statement to help advise Clarion plc in their decision to close the Elite division immediately rather than waiting one year. You should also explicitly state whether they should close the Elite division immediately or not using a maximum of 50 words. You may use fewer words if you wish. [20 marks] b. Identify and briefly comment on any other factors that Clarion plc may take account of before taking a decision on whether to close the Elite Division. Your answer should be a maximum of 200 words. You may use fewer words if you wish to [5 marks)
