Urgent Help on Specific Question - Relevant Costs

An0nym0us

Question

Proposed Showroom Closures

Barbara Sinta, the Sales and Marketing Director, has asked you to help her review the viability of some EAM Ltd's showrooms.
According to the management accounts for the year ended 31 Dec 20X3, three of these showrooms are operating at a loss.
Barbara has suggested that these showrooms should be closed down as soon as possible.
However, Alison Clockwell, the Finance Director, has told her that decisions like this have to be based on relevant costs.

The following extract from the management accounts for the year ended 31 Dec 20X3 shows the calculation of losses for the three showrooms.

Extract from management accounts

Showroom 7 l Showroom 12 l Showroom 15

Sales Value

Vehicles 616,000.00 l 655,500.00 l 779,700.00
Vehicle Parts 87,306.00 l 105,920.00 l 124,880.00

Total Sales 703,306.00 l 761,420.00 l 904,580.00



Cost of Sales

Vehicles 470,400.00 l 494,160.00 l 598,720.00
Vehicle Parts 49,988.00 l 50,077.00 l 60,596.00
Warehouse Labour 46,720.00 l 46,622.00 l 64,120.00
Warehouse Overheads 35,760.00 l 35,676.00 l 36,960.00

Total 602,868.00 l 626,535.00 l 760,396.00


Other Costs

Showroom Wages 95,800.00 l 95,000.00 l 103,600.00
Delivery and Returns 43,600.00 l 48,700.00 l 55,700.00
Share of Central Overheads 19,160.00 l 19,000.00 l 20,720.00
Total 158,560.00 l 162,700.00 l 180,020.00

Profit / (Loss) -58,122.00 l -27,815.00 l -35,836.00


Notes
- Vehicles are purchased from various suppliers. These suppliers also supply vehicle parts.
- Warehouse labour costs are variable and warehouse overhead costs are fixed.
- All deliveries and collections are handled by a firm of couriers. The daily rate for each showroom depends upon the journey distance from the central warehouse
- Showroom wages are considered to be variable
- Central overheads are the fixed costs of marketing and administration which are recovered at 20% of each showroom's wages.






Prepare the following information from the data in the management accounts extract.

(b)Calculate the relevant costs and contribution of each showroom in 20X3.
Use a minus sign to indicate any negatie figures. (6 marks)


Showroom 7 l Showroom 12 l Showroom 15

Relevant Cost for each showroom
Contribution for each showroom






(c)Explain whether each of the showrooms should close or remain open, based on your caluclations in part b. (6 marks)





(d)Explain why the showroom costs are considered to be either relevant or not relevant costs. (3 marks)