a) Advise management on whether department B should remain open or closed explaining and justifying your view

This question can be approached in two ways.

1. Focus on the incremental costs and revenues relating to the decision to close department B
2. Compare the overall profit of the business running including department B with the overall profit of the business excluding department B.

Either approach should yield the same result.

Taking the first approach the incremental costs and revenues associated with closing department B are as follows

The business would be €31,000 worse off if it closed department B 

The second approach should give the same result. This requires the calculation of overall profit based on Department B closing. In this approach it is assumed that the non incremental fixed costs of department B are evenly divided between department A and C.

 By comparing the overall profit including department B of €120,000 with the overall profit excluding department B of €89,000 it can be seen that the business is  €31,000 worse off by closing department B

b) Briefly outline the non-quantifiable factors that management should take into account before making a decision.

Non-quantifiable or qualitative factors are best described as factors that cannot be quantified in terms of income and costs. In many respects some of the so called qualitative factors could be quantifiable in terms of their effects on the business but this quantification process would be very expensive and not worth the cost. The nature of qualitative factors in decision-making will almost always vary with the circumstances of the decision under review and the options under consideration. Regarding the above decision to close a department, management should be aware of the following qualitative factors, which should have an influence on the decision.

The effect of closure on existing and potential customers - Management must assess the affects of closure on their customer base. For example, if customers feel goods and service provided by department B will not be available, that could influence their decision to purchase goods and services in the other departments. Ultimately the exclusion of one service from a range because, in financial terms, it is uneconomic to provide and sell, could affect the demand for other services. Services and products sold by firms are often inter-dependant and this should be taken into account in the decision-making process.

The effect on employees and unions - Any decision regarding the closure of a section of a business needs to be accepted by employees and their unions. Bad labour relations caused by decisions that involve such changes can lead to poor morale, inefficiencies and losses.

The reaction of competitors - How competitors will react to any changes should also be taken into account. For example if Home Stores reduced the variety of goods and services offered, this provides an opportunity for competitors to offer such goods and services and thue increasing their market share. Again management need to be mindful of the inter-dependence of products and how competitors will react to increase their market share

The effect on suppliers - Closure decisions will affect suppliers and hence this relationship and their reaction must be taken into account in the decision-making process. Will closure of department B affect other supplies of goods and services. Will the business lose out on quantity discount and what effect will it have on the ability of suppliers to continue to supply the other departments.