The annual flexible budget for a company is as follows:

Production capacity 40% 60% 80% 100%

Costs: K K K K

Direct labour 16 000 24 000 32 000 40 000

Direct material 12 000 18 000 24 000 30 000

Production overhead 11 400 12 600 13 800 15 000

Administration overheads 5 800 6 200 6 600 7 000

Selling & distribution overhead 6 200 6 800 7 400 8 000

Total 51 400 67 600 83 800 100 000

Owing to trading difficulties, the company is operating at 50% capacity. Selling prices have had to be lowered to what the directors maintain is an uneconomic level and they are considering whether or not their single factory should be closed down until the trade recession has passed . A market research consultant has advised that in about 12 months time there is every indication that sales will increase to about 75% of normal capacity and that the revenue to be produced in the second year will be K90 000. The present revenue from sales at 50% capacity will be only K49 500 for a complete year. If the directors decide to close down the factory for a year it is estimated that: a). the present fixed costs would be reduced to K11 000 b). closing down costs like redundancy payments would be K7 500 c). necessary maintenance of plant would cost K1 000 per annum d). on re-opening the factory, the cost of overhauling plant, training and engagement of new personnel would be K4 000.

Required: Prepare a statement for the directors, presenting information in such a way as to indicate whether or not it is desirable to close the factory.