Question

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.

Answer 1

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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