Question

Problem 4-61 Closing a Plant (LO 4-4) You have been asked to assist the management of Ironwood Corporation in arriving at certain decisions. Ironwood has its home office in Michigan and leases factory buildings in Wisconsin, Minnesota, and North Dakota, all of which produce the same product. Ironwood's management provided you a projection of operations for next year as follows: Total $880,000 Wisconsin $440,000 Minnesota $280,000 North Dakota $160,000 Sales revenue Fixed costs Factory Administration Variable costs Allocated home office costs Total Operating profit 220,000 70,000 290,000 100,000 $680,000 $200,000 112,000 42,000 133,000 45,000 $332,000 $108,000 56,000 22,000 85,000 35,000 $198,000 $ 82,000 52,000 6,000 72,000 20,000 $ 150,000 $ 10,000 The sales price per unit is $5. Due to the marginal results of operations of the factory in North Dakota, Ironwood has decided to cease its operations and sell that factory's machinery and equipment by the end of this year. Ironwood expects that the proceeds from the sale of these assets would equal all termination costs. Ironwood, however, would like to continue serving most of its customers in that area if it is economically feasible and is considering one of the following three alternatives: • Expand the operations of the Minnesota factory by using space presently idle. This move would result in the following changes in that factory's operations: Increase over Minnesota factory's current operations Sales revenue 50% Fixed costs Factory Administration 20 10 Under this proposal, variable costs would be $2 per unit sold. • Enter into a long-term contract with a competitor that will serve that area's customers. This competitor would pay Ironwood a royalty of $1 per unit based on an estimate of 30,000 units being sold. • Close the North Dakota factory and not expand the operations of the Minnesota factory. Total home office costs of $100,000 will remain the same under each situation. Required: To assist the management of Ironwood Corporation, complete the following schedule computing Ironwood's estimated operating profit from each of the following options: a. Expansion of the Minnesota factory

Answer 1

Ques 1
Minnesota factory
Sales		$        420,000
costs
factory	$          67,200
administration	$          24,200
Variable costs	$        168,000
Allocated home office costs	$          35,000
total		$        294,400
estimated operating profit		$        125,600
winconsin factory estimated operating profit		$        108,000
Less:Home office costs previously allocated to north dakota factory		$        (20,000)
estimated operating profit		$        213,600
Ques 2
Estimated operating profit
Winconsin Factory	$        108,000
Minnesota factory	$          82,000
estimated royalties to be received	$          30,000
	$        220,000
Less:Home office costs previously allocated to north dakota factory	$        (20,000)
Estimated operating profit	$        200,000
Ques 3
Estimated operating profit
Winconsin Factory	$        108,000
Minnesota factory	$          82,000
	$        190,000
Less:Home office costs previously allocated to north dakota factory	$        (20,000)
Estimated operating profit	$        170,000
Working Notes
a. Sales: $420,000 ($280,000 × 150%) Factory: $67,200 ($56,000 × 120%) Administration: $24,200 ($22,000 × 110%) Variable costs: $168,000 [$2 × ($420,000 ÷ $5 sales price)] Home office costs continue to be incurred by the company even though North Dakota has been closed. b. Estimated royalties to be received = $30,000 (30,000 × $1) Home office costs continue to be incurred by the company even though North Dakota has been closed. c. Home office costs continue to be incurred by the company even though North Dakota has been closed. The best deal for Ironwood is to expand operations of the Minnesota factory