Question 1 (35 marks), please limit your answer to 1,100 words as a maximum:

World-Food Ltd owns and operates a number of food outlets throughout the UK. Board of directors are considering restructuring the departments operating at Coventry outlet. A summary of the forthcoming year's budget is given below:

Department

Bakery

Diary

Butcher

Home and Garden

Sales ()

210,000

90,000

150,000

150,000

Costs ()

138,125

60,625

105,000

124,750

Department Size

(sq. metre)

62.5

37.5

50

50

The above costs exclude the central administrative charges of 137,500, to be allocated to each department as a proportion of sales. Board of directors of World-Food Ltd was informed by the accounting department that once an adjustment is made for these charges, one of the departments would generate a loss. Board of directors is keen to close this loss-making department but has been advised against doing so by the accounting department.

Other relevant information:

Costs above include a total of 50,000 fixed costs for rent and rates that are charged to departments according to the square metres occupied. These costs are payable in advance.

In addition to salaries, employees at the outlet receive a commission amounting to 15% of total sales for each department. Salaries and commission are included in the above budgeted costs for each department.

All other costs are variable.

A closure of a department will have no impact on the central administrative charges during that year.

Requirements for question 1:

a)Calculate which department makes a loss following the allocation of the central administrative charges.(5 marks)

b)Re-calculate the contribution and profit of each department using the above relevant information.(7 marks)

c)If the loss-making department is closed, what will be the financial impact for World-Food Ltd for the forthcoming year?(7 marks)

d)Advise the board of directors what action to take, highlighting the usefulness of contribution analysis with such decisions.(11 marks)