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RTP A Company having its Head Office in New Delhi has three factories UP, MP and TN. The operations of the Factory in MP have Total 800 490 150 50 65 45 30 5 (1) Present Value of Benent Conclusion: Hence, Proposal 3 may be accepted, de contracted to X Lid. 39 Profitability Analysis - Evaluation of Alternatives by closure of one division been unprofitable for a number of years. The leasehold of MP Factory will also expire by the end of the current year. In view of continued losses, the Management has decided to close down the MP Factory rather than renew the lease. The Factory s Machinery can be sold at a price higher than the WDV and the surplus funds will be sufficient to cover all termination TN costs. The projected profitability of the Factories for the coming year are: (in ? Lakhs) UP MP Particulars 100 300 400 Sales 75 195 220 Variable Costs 40 80 Fixed Costs: Factory 15 Selling and Administration 30 25 15 25 HO Expenses apportioned 25 Profit 7 (Loss) (25) 45 The Company would however, like to continue to serve the customer's needs now being served by MP Factory, if it could do so economically. Accordingly, the following proposals were put forward for consideration based on a Selling Price of * 250 p.u. Close down MP Factory and expand the operations of the TN Factory for which capacity exists there. This proposal will involve the following changes - (a) Sales Revenue of TN Factory will increase by 25%, (b) Fixed Costs of TN Factory will increase by 10%, (c) Fixed Selling and Administration of TN Factory will increase by 5%, (d) Variable Distribution Costs of the additional output will increase by 4 per unit. Close down MP Factory and expand operations in UP Factory subject to the following changes in the latter (a) Sales Revenue will increase by 80 Lakhs, (b) Fixed Factory Costs will increase by 20%, (c) Fixed Selling and Administration Costs will increase by 10%, (d) Variable Distribution Costs in respect of the additional output will increase by 5 per unit. 3. Close down MP Factory and enter into long-term contract with an independent Manufacturer to serve the customers of MP Factory. This Manufacturer will pay a Royalty of 75 per unit to the Company. In that event, the Sales of the area served by the MP Factory will decrease by 25% 4. Close down MP Factory and discontinue serving the customers of that area. Fraluate each of these proposals and advise the Management for improving the Company's profitability. 1. 2