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 profit..................................................................

Answer 1