Question

In: Accounting

You have been asked to assist the management of Ironwood Corporation in arriving at certain decisions....

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 with a projection of operations for next year, as follows.

Total Wisconsin Minnesota North Dakota
Sales revenue $ 894,000 $ 443,000 $ 289,000 $ 162,000
Fixed costs
Factory 218,000 112,000 55,000 51,000
Administration 68,000 37,000 25,000 6,000
Variable costs 296,000 135,000 88,000 73,000
Allocated home office costs 101,000 45,000 34,000 22,000
Total $ 683,000 $ 329,000 $ 202,000 $ 152,000
Operating profit $ 211,000 $ 114,000 $ 87,000 $ 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 21
Administration 9

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 $1.1 per unit based on an estimate of 29,000 units being sold.

• Close the North Dakota factory and not expand the operations of the Minnesota factory.

Total home office costs of $101,000 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.

b. Negotiation of the long-term contract on a royalty basis.

c. Shutdown of the North Dakota operations with no expansion at other locations.

Solutions

Expert Solution

Requirement – a

               

IRONWOOD CORPORATION

Computation of Estimated Profit from Operations after Expansion of Minnesota Factory

Minnesota Factory-

Sales ($289,000 * 1+ 50%)

($289,000 * 1.5)

         433,000

Costs-

     Factory (55,000 * 1+21%)

(55,000 * 1.21)

           66,550

     Administration ($25,000 * 1+9%)

($25,000 * 1.09)

           27,250

     Variable costs ($433,000/ $5) *$2

$86,600 * $2

         173,200

     Allocated home office costs

           34,000

Total (66,550 +27,250 +173,200 +34,000)

301,000

Estimated Operating profit (433,000 - 301,000)

         132,000

Wisconsin Factory estimated operating profit

         114,000

Less - Home office costs previously allocated to North Dakota Factory

-         22,000

Estimated Operating Profit( 114,000 - 22,000)

         224,000

Requirement – b

               

IRONWOOD CORPORATION

Computation of Estimated Profit from Operations after Negotiation of royalty Contract

Estimated Operating Profit -

   Wisconsin Factory

   114,000

   Minnesota Factory

     87,000

   Estimated Royalties to be received (29,000 * $1.1)

     31,000

Total ( 114,000 + 87,000 + 31,000)

   232,000

Less - Home office costs previously allocated to North Dakota Factory

-         22,000

Estimated Operating Profit ( 232,000 - 22,000)

   210,000.00

Requirement – c

IRONWOOD CORPORATION

Computation of Estimated Profit from Operations after after Shutdown of North Dakota Factory

Estimated operating Profit -

   Wisconsin Factory

         114,000

   Minnesota Factory

           87,000

Total ( 114,000 + 87,000 )

201,000

Less - Home office costs previously allocated to North Dakota Factory

-         22,000

Estimated operating Profit ( 201,000 - 22,000)

         179,000

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