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 $ 874,000 $ 434,000 $ 274,000 $ 166,000 Fixed costs Factory 214,000 113,000 54,000 47,000 Administration 74,000 46,000 23,000 5,000 Variable costs 287,000 130,000 86,000 71,000 Allocated home office costs 100,000 46,000 33,000 21,000 Total $ 675,000 $ 335,000 $ 196,000 $ 144,000 Operating profit $ 199,000 $ 99,000 $ 78,000 $ 22,000 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 18 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 $0.9 per unit based on an estimate of 26,000 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. b. Negotiation of the long-term contract on a royalty basis. c. Shutdown of the North Dakota operations with no expansion at other locations. a. Ironwood Corporation Computation of Estimated Profit from Operations after Expansion of Minnesota Factory Minnesota factory:  Sales  Fixed costs   Factory   Administration  Variable costs  Allocated home office costs   Total  Estimated operating profit Wisconsin factory—estimated operating profit Less home office costs previously allocated to North Dakota factorya Estimated operating profit b. 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 Less home office costs previously allocated to North Dakota factorya............................................................................................ Estimated operating profit................................................................... c. Ironwood Corporation Computation of Estimated Profit from Operations after Shutdown of North Dakota Factory Estimated operating profit:  Wisconsin factory............................................................................  Minnesota factory............................................................................ Less home office costs previously allocated to North Dakota factorya.......................................................................................... Estimated operating pr

Answer 1