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 a projection of operations for next year as follows:

	Total			Wisconsin			Minnesota			North Dakota
Sales revenue	$	896,000		$	449,000		$	288,000		$	159,000
Fixed costs
Factory		228,000			116,000			56,000			56,000
Administration		70,000			41,000			23,000			6,000
Variable costs		298,000			132,000			90,000			76,000
Allocated home office costs		100,000			46,000			33,000			21,000
Total	$	696,000		$	335,000		$	202,000		$	159,000
Operating profit	$	200,000		$	114,000		$	86,000		$	0

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	48	%
Fixed costs
Factory	18
Administration	11

Under this proposal, variable costs would be $2 per unit sold.

	--> Enter into a long-term contract with a competitor who will serve that area's customers. This competitor would pay Ironwood a royalty of $0.9 per unit based on an estimate of 33,000 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.

	IRONWOOD CORPORATION Computation of Estimated Profit from Operations after Expansion of Minnesota Factory Minnesota factory: Sales Costs Factory Administration Variable costs Allocated home office costs Total 0 Estimated operating profit Wisconsin factory-estimated operating profit Less home office costs previously allocated to North Dakota factory Estimated operating profit

b.	Negotiation of long-term contract on a royalty basis.
	IRONWOOD CORPORATION Computation of Estimated Profit from Operations after Negotiation of Royalty Contract Estimated operating profit: Wisconsin factory Minnesota factory Estimated royalties to be received $0 Less home office costs previously allocated to North Dakota factory Estimated operating profit c. Shutdown of North Dakota operations with no expansion at other locations. IRONWOOD CORPORATION Computation of Estimated Profit from Operations after Shutdown of North Dakota Factory Estimated operating profit: Wisconsin factory Minnesota factory $0 Less home office costs previously allocated to North Dakota factory Estimated operating profit

Answer 1

(a)

IRONWOOD CORPORATION
Computaion of Estimated Profit from operations
after Expansion of Minnesota Factory
Minnesota Factory:
Sales *		368640
Costs:
Factory **		66080
Administration ***		25530
Variable costs ****		147456
Total costs		239066
Estimated operating profit - Minnesota factory		129574
Wisconsin factory - operating factory		114000
		243574
Less: home office costs previously		21000
allocated to North Dakota factory
Total estimated operating profit		222574
Working:
Sales	288000
Unit sales price	5
Number of units sold	57600
After expenasion:
Increase in sales	28%
Revised sales value *	368640
Revised number of units sold	73728
Unit variable cost	2
Total variable cost ****	147456
Fixed Costs :
Factory (18% increase) **	66080
Administration (11% increase) ***	25530

(b)

IRONWOOD CORPORATION
Computaion of Estimated Profit from operations
after negotiation of royalty contract
Estimated operating profit
Wisconsin factory		114000
Minnesota factory		86000
Estimated royalties received (33,000 x $0.90)		29700
		229700
Less: home office costs previously		21000
allocated to North Dakota factory
Total estimated operating profit		208700

(c)

IRONWOOD CORPORATION
Computaion of Estimated Profit from operations
after shutdown of North Dakota Factory
Estimated operating profit
Wisconsin factory		114000
Minnesota factory		86000
		200000
Less: home office costs previously		21000
allocated to North Dakota factory
Total estimated operating profit		179000