Terlingua Transportation Co. (TTC) is a regional shipper. It is most cost efficient for the company’s diesel fuel trucks to refuel at retail outlets along the shipping routes. However, retail prices tend to be volatile. Hence, managers at TTC have decided to hedge future retail purchases of fuel by means of New York Harbor ULSD (ultra low sulphur diesel) futures contracts. Each contract has 42,000 gallons as the underlying asset. You are a financial analyst for TTC. Today is April. Your immediate task is to hedge the price risk of diesel future purchases in three months (i.e., in July). You expect that TTC trucks will need to buy a total of 700,000 gallons of diesel fuel in July. You plan to apply dynamic hedging. Based on calculations for a 3-month hedge, you determine that your company needs to take a long position in 20 of the August futures contracts today. Time passes. Today now is May. Forecast for quantity of the July purchase of diesel fuel is unchanged. You plan to continue hedging with August contracts. You have the following statistical data. All spot prices are retail prices for diesel fuel. All futures prices are for the New York Harbor ULSD futures. Standard deviations are in cents per gallon. standard deviation of 1-month changes in spot prices: 14 standard deviation of 2-month changes in spot prices: 24 standard deviation of 3-month changes in spot prices: 34 standard deviation of 1-month changes in futures prices: 15 standard deviation of 2-month changes in futures prices: 27 standard deviation of 3-month changes in futures prices: 36 1-month correlation between spot and futures prices: 1.10 2-month correlation between spot and futures prices: 1.17 3-month correlation between spot and futures prices: 1.23 In your calculations for optimal number of futures contracts, you optimize using the formulas for cross hedging. Calculate the change in optimal number of futures contracts that your company should be long. Report the change as an integer value. If you decrease the number of contracts, report a negative number. (When you calculate the new value for N*, round to the nearest integer.)

( PARTS 5-8 Only )

1.Generate a scatter plot for CREDIT BALANCE vs. SIZE, including the graph of the "best fit" line. Interpret.

2.Determine the equation of the "best fit" line, which describes the relationship between CREDIT BALANCE and SIZE. Interpret the values for slope and intercept.

3.Determine the coefficient of correlation. Interpret.

4.Determine the coefficient of determination. Interpret.

5. Test the utility of this regression model (use a two tail test with α=.05) by setting up the appropriate test of hypothesis. Interpret your results, including the p-value.

6. Based on your findings in 1-5, what is your opinion about using SIZE to predict CREDIT BALANCE? Explain.

7.Compute the 98% confidence interval for β1 (the population slope). Interpret this interval.

8. What can we say about the credit balance for a customer that has a household size of 9 ? Explain your answer.

Location	Income ($1000)	Size	Years	Credit Balance ($)
Urban	54	3	12	4,016
Rural	30	2	12	3,159
Suburban	32	4	17	5,100
Suburban	50	5	14	4,742
Rural	31	2	4	1,864
Urban	55	2	9	4,070
Rural	37	1	20	2,731
Urban	40	2	7	3,348
Suburban	66	4	10	4,764
Urban	51	3	16	4,110
Urban	25	3	11	4,208
Urban	48	4	16	4,219
Rural	27	1	19	2,477
Rural	33	2	12	2,514
Urban	65	3	12	4,214
Suburban	63	4	13	4,965
Urban	55	6	15	4,412
Urban	21	2	18	2,448
Rural	44	1	7	2,995
Urban	37	5	5	4,171
Suburban	62	6	13	5,678
Urban	21	3	16	3,623
Suburban	55	7	15	5,301
Rural	42	2	19	3,020
Urban	41	7	18	4,828
Suburban	54	6	14	5,573
Rural	30	1	14	2,583
Urban	48	2	8	3,866
Urban	34	5	5	3,586
Suburban	67	4	13	5,037
Rural	50	2	11	3,605
Urban	67	5	1	5,345
Urban	55	6	10	5,370
Urban	52	2	11	3,890
Urban	62	3	2	4,705
Urban	64	2	6	4,157
Suburban	22	3	18	3,899
Urban	29	4	4	3,890
Suburban	39	2	18	2,972
Rural	35	1	11	3,121
Urban	39	4	15	4,183
Suburban	54	3	9	3,730
Suburban	23	6	18	4,127
Rural	27	2	1	2,921
Urban	26	7	17	4,603
Suburban	61	2	14	4,273
Rural	30	2	14	3,067
Rural	22	4	16	3,074
Suburban	46	5	13	4,820
Suburban	66	4	20	5,149
Rural	53	1	7	2845
Urban	44	6	5	3962
Suburban	74	7	12	5394
Urban	25	3	15	3442
Suburban	66	7	14	5036

We assume that our wages will increase as we gain experience and become more valuable to our employers. Wages also increase because of inflation. By examining a sample of employees at a given point in time, we can look at part of the picture. How does length of service (LOS) relate to wages? The data here (data438.dat) is the LOS in months and wages for 60 women who work in Indiana banks. Wages are yearly total income divided by the number of weeks worked. We have multiplied wages by a constant for reasons of confidentiality.
(a) Plot wages versus LOS. Consider the relationship and whether or not linear regression might be appropriate. (Do this on paper. Your instructor may ask you to turn in this graph.)

(b) Find the least-squares line. Summarize the significance test for the slope. What do you conclude?
Wages =   + LOS
t =     
P =  

(c) State carefully what the slope tells you about the relationship between wages and length of service.

This answer has not been graded yet.

(d) Give a 95% confidence interval for the slope.
( , )

worker  wages   los     size
1       48.8329 97      Large
2       78.2535 28      Small
3       48.5138 22      Small
4       41.3975 34      Small
5       46.5544 22      Large
6       50.0827 36      Small
7       49.9522 30      Large
8       41.034  38      Large
9       42.8532 50      Large
10      42.9051 160     Small
11      60.7879 67      Large
12      63.7248 90      Small
13      44.9267 75      Small
14      66.4115 45      Large
15      54.5279 62      Large
16      38.777  33      Large
17      40.5469 74      Large
18      42.0242 33      Small
19      39.4129 151     Large
20      59.0103 145     Large
21      57.4567 17      Large
22      49.0608 38      Small
23      72.6341 141     Large
24      43.5226 36      Small
25      40.3436 56      Large
26      46.0549 88      Small
27      38.4406 133     Small
28      62.0137 44      Large
29      48.8695 116     Large
30      38.204  23      Large
31      44.858  83      Small
32      55.3133 21      Large
33      56.7109 16      Large
34      40.989  34      Small
35      50.3024 90      Large
36      39.6625 26      Large
37      38.9004 88      Large
38      54.0486 83      Small
39      39.6416 134     Large
40      54.4411 69      Small
41      43.3311 101     Small
42      52.6132 124     Small
43      51.0736 114     Large
44      40.7319 119     Small
45      86.2669 46      Large
46      44.7879 38      Small
47      61.0304 27      Large
48      37.5828 90      Large
49      79.3865 32      Small
50      60.6761 155     Large
51      56.5249 42      Large
52      45.8192 60      Large
53      42.2774 143     Large
54      37.538  38      Small
55      79.559  47      Small
56      46.9229 111     Large
57      66.448  55      Small
58      39.1776 96      Large
59      79.3531 119     Small
60      45.389  106     Large

I really don't understand how to do this problem. Can someone explain every step?

Introduction

Lori Patrick’s conversation earlier that day with Mike Lowe, the company’s

CEO, kept running through Lori’s head during her 45-minute rush-hour

commute home. “What a great opportunity Mike’s given me,” she thought.

“The CEO of this organization believes in the value of HR and asked me to

tell him how HR can help the company meet its strategic goals. When I was

studying for my master’s in HR, we kept reading and talking about how HR

needs to position itself as a strategic business partner; but I didn’t think I

would get the opportunity so soon in my career.” Lori had been the director

of Human Resources with Reyes Fitness Centers, Inc. (R FC) for only a couple

of months. She had been attracted to the position in part because it offered her

first opportunity to oversee all of HR, and because of her interview with Mike

Lowe. Lowe was fairly new to the company (just less than two years) and was

highly regarded by the founder and chairman, John Reyes, and the rest of the

board of directors as a strategic thinker and someone with proven ability to

inspire and motivate staff. Lori knew from the interview with Lowe that when

he said employees were the key to RFC’s future, he meant it.

RFC background

Reyes Fitness Centers, Inc. was launched in May of 1999 by John Reyes with

$150,000 of his own funding and some investment capital from three college

friends from the University of North Carolina, Chapel Hill, where they were

business majors attending the university in the mid-1990s. The first center

was located in Raleigh, NC, and was an immediate success. The center offered

a full range of workout equipment, exercise classes, personal trainers, an

outdoor pool, on-site daycare, and even a small restaurant. Additional private

investment was secured and R FC expanded rapidly from 1999 to 2007, opening

approximately three new centers a year throughout the Southeast. By the end of

2007, RFC operated 28 fitness centers, grossing $51 million in revenues and $1

million in net income. Figure 1.0 below provides the financial performance of

RFC and its comparison to competitors.

By 2005, John Reyes had general managers overseeing each center and had

gradually removed himself from day-to-day oversight of the company. He

had become interested in other business ventures and, as a result, his board

encouraged hiring a CEO and other senior management team members to

oversee the growing enterprise. He hired 48-year-old Mike Lowe as the

new CEO of RFC in late 2005, and Reyes assumed the role of chairman.

This CEO position was the second in Lowe’s career. He had more than 20

years’ experience in the fitness equipment industry; before coming to RFC

he had been the CEO of a smaller fitness center company in California that

had been acquired. Lowe’s transition as CEO had gone quite well in Reyes’,

the board’s and in Lowe’s view. Lowe had been somewhat concerned about

being micromanaged by Reyes, but he was given complete autonomy over

the operations of the company and was expected to involve the board only in

strategic leadership issues

The Fitness center industry

While the fitness center industry grew dramatically in the mid to late 1990s

(more than 20 percent annually), overall industry growth had slowed

considerably, as most towns now had two to three fitness centers within

close proximity.

As shown in Figure 1.0, RFC is considered a medium-sized fitness center

enterprise. While some competitors (Day Spa and Constant Fitness in

particular) continue to focus on large-scale, either through acquisitions of

smaller fitness clubs or by opening new fitness centers, many others (including

RFC) have reduced the number of new clubs being opened.

There is as much emphasis on health and recreation as ever in the U.S. Industry

reports suggest that the outlook for fitness centers in general is quite positive,

although some consolidation may occur because certain markets have been

saturated with too many clubs to remain profitable. However, the market in the

Southeast (where RFC operates) is still growing and market saturation is not

anticipated for at least five years.

Fitness centers hire a variety of professional and support staff. Some focus on

personal training and employ a large number of certified professional trainers

who work with members during club hours (typically 5-6am until 10pm,

although the more body-building oriented gyms have recently started offering

24-hour service). In addition to housekeeping and front desk staff, fitness

centers employ customer service representatives who can assist existing members

with questions and also act as sales representatives, giving tours of the facility to

prospective members.

RFC strategy

During Lowe’s tenure, RFC opened just one new fitness center (just outside

of Atlanta, GA). This modest club expansion is consistent with the three-

year financial strategy the RFC board has agreed on, where the focus is on

growing the profitability of existing clubs by increasing member enrollment and

retention. The company is privately held by a small group of investors and the

board wants it to stay that way. The board has discussed positioning itself for

acquisition by one of the larger fitness club chains at some point in the future. It

is agreed that improving the bottom-line (i.e., net income) performance of RFC

will only help in this regard.

Within Porter’s classic framework of various business strategies, RFC’s strategy

most closely aligns with Porter’s “focus” strategy, where a company focuses

on serving the needs of a particular market segment to achieve a competitive

advantage. RFC has positioned itself as a place where the whole family can

enjoy fitness and social activities. RFC has deliberately chosen not to compete

with gyms that cater to body builders with large free weight workout areas,

24-hour access, onsite training supplement sales, and “no-frills” amenities.

RFC’s strategy is to attract families by offering a wide variety of fitness offerings

including cardio equipment; free weights and circuit training weight machines;

personal training; and exercise classes (such as Pilates, yoga, stationary cycling,

etc.). Most RFC fitness centers have a snack bar where nutritional smoothies

and other healthy snacks can be purchased. All RFC centers offer extensive

locker room facilities and on-site daycare. Newer RFC fitness centers have small

indoor basketball courts and TV lounges to appeal to the 10- to 16-year-old

age group.

From his first day on the job, Lowe has stressed to the staff that he wants them

to be strategic in how they approach their daily, weekly, and annual activities

and projects. By that he means that they should consider how their jobs

contribute to RFC being able to provide a fitness club experience to couples and

families that is superior to any of the competition. He has worked diligently

with his senior management team and the board to understand how RFC

creates value for its customers, employees and investors. The business model

for how fitness centers make money is fairly straightforward: profitable firms

grow by recurring monthly member revenue (via new member recruitment and

existing member renewal) while maintaining relatively stable fixed costs and

low variable costs. Lowe has worked to identify both financial and nonfinancial

variables that drive RFC performance. By locating RFC fitness centers in upper-

middle-class locations and focusing marketing efforts on couples and families,

RFC has been successful recruiting new members. Research data shows that

members typically do not have issues with the RFC monthly dues. Member

feedback indicates that having a friendly place for the whole family to stay fit is a

driver of member value.

RFC Strategic Challenges

As with most start-ups, the early strategy for RFC focused on growing

revenue. They did this by opening several clubs each year and offering new

club promotions to attract members. RFC experienced rapid revenue growth

(more than 20 percent annually) through 2004. However, several of the RFC

centers are not reaching their profit goals. Mike Lowe tried to address this by

implementing operational efficiencies when he first came on board at RFC,

but he soon realized that the profit challenges were driven in large part by a

customer retention problem. While a certain amount of turnover is expected in

the industry (due to competing clubs, families moving out of the area, etc.), the

best industry data RFC can find relating to member retention shows that their

member retention is approximately 20 percent lower than industry average.

An analysis of member records shows that members often join during a special

promotion (where the initiation fee is waived) but then rarely use the center

and fail to renew. A telephone survey of members (lapsed and current) reveals

that “non-use” was one of the reasons for members not renewing or stating

they were unlikely to renew. An analysis of member-visit frequency shows that

more than 50 percent of members in 2006 hadn’t even visited their RFC fitness

center two times per week. The hypothesis is that members who aren’t going

to their RFC fitness center frequently are far less likely to see sufficient value to

renew. Another concern is member feedback that RFC staff members do not

provide very good or excellent customer service. Lowe, senior management, and

the board have had extensive discussions about the member retention problem.

While part of Lowe’s strategy to increase profits is to enroll more members in

existing fitness centers, those profits will be short-lived if members stay only one

year. Data also shows that membership cost, quality of offerings, amenities, etc.,

are all rated highly.

Lori thinks about these strategic issues and how HR might affect them.

“There’s no question that problems with customer service and member

retention come down to people issues. It is affected by the type of people we

bring on board, how they’re trained and how their performance is managed

and rewarded.”

Questions:

1. Identify and prioritize a set of tasks for Lori. Provide a rationale for your prioritization. Link your responses to the key concepts to one of the examples in the The HR Scorecard.

2. Based on your understanding of RFC and its business strategy, how can HR add strategic value to RFC?

3. What challenges do you anticipate Lori will encounter as she develops the HR scorecard for RFC?

4. Anticipate potential outcomes for the plan that is proposed for RFC?

Thanks for your help!

A multiple regression model is to be constructed to model the time spent using the internet per week among internet users. The explanatory variables are age, hours spent working per week and annual income.

Data has been collected on 30 randomly selected individuals:

Time using internet (minutes)	Age	Hours working per week	Annual income ('000)
140	56	39	28
257	35	31	79
163	35	35	34
115	33	52	27
182	45	36	37
214	51	57	80
187	44	37	50
142	26	55	41
251	19	47	35
203	21	42	36
243	28	25	26
244	23	26	28
131	48	56	46
174	24	54	63
131	51	52	78
178	38	39	79
135	22	50	36
124	31	57	27
173	57	44	60
189	33	35	58
179	59	30	35
230	37	27	51
121	59	46	53
150	36	40	49
151	42	47	80
147	38	56	35
195	54	32	59
134	58	52	44
190	39	28	27
197	58	40	72

a.) Find the multiple regression equation using all three explanatory variables. Assume that x₁ is age, x₂ is hours working per week and x₃ is annual income. Give your answers to 3 decimal places.

y^ = _____ + _______age + ________ hours working + ________ annual income

b.) At a level of significance of 0.05, the result of the F test for this model is that the null hypothesis (is) (is not) rejected.

c.) The value of R² for this model, to 3 decimal places, is equal to __________

d.) The value of s for this model, to 3 decimal places, is equal to _________

e.) The least significant explanatory variable in this model is:

a.) age
b.) hours working per week
c.) annual income

f.) Construct a new multiple regression model by removing the variable annual income. Give your answers to 3 decimal places.

The new regression model equation is:

y^ = ________ + _________ age + ________ hours working

g.) In the new model compared to the previous one, the value of R² (to 3 decimal places) is:

a.) increased
b.) decreased
c.) unchanged

h.) In the new model compared to the previous one, the value of s (to 3 decimal places) is:

a.) increased
b.) decreased
c.) unchanged

i.) The better model is the:

a.) original model
b.) reduced model

Case 5.0: Incentives in the Firm – Compensating the CEO

Let’s work through an incentive concept and problem. “Moral hazard” problems arise when someone – the “principal” – hires an agent to do something, but the agent has an incentive to do something else. For example, firm owners may want their management team to maximize profits, but maximizing profits is hard, time-consuming work that could interfere with the management team’s preference for playing golf. If top management simply receives a salary, the problem is aggravated because the managers may not be motivated to satisfy the owners, and the owners can’t easily monitor management activity to know if they’re really doing a good job. The problem is resolved in large part if the owners tie most or all of management compensation to firm profits, as income is often a pretty good motivator (although some golf nuts will still pause for a while over this one.) We can set up a scenario to explore this incentive issue further, and this problem will also help fix in our minds the difference between maximizing revenue and maximizing profit.

A small firm faces an inverse demand function of P = 100 - Q. Its total cost function is given by TC = .5Q².   (You should see right away that marginal revenue is thus MR = 100 – 2Q, and it also happens that marginal cost is just MC = Q. Both MR and MC are the first derivatives of total revenue and total cost. And a quick comment on MC: unlike some marginal cost functions we’ve seen, this one is not constant, because marginal cost is getting $1 higher with each additional unit of output.)

The Chief Executive Officer will manage the firm, choosing output and price. Currently, the CEO is negotiating an incentive-based contract with the shareholders of the company. The CEO has proposed that she get 20% of the total revenue brought in by the firm. The shareholders' representative has counter-offered that 10% of total revenue be given to the CEO. (Hint: basing compensation on revenue will motivate revenue maximization rather than profit maximization!)

1.    How much income will each plan generate for the CEO and for the shareholders, respectively? (Hint: since both plans create incentives for the CEO to maximize revenue rather than profit, you should not set MR = MC at this point. BIG hint: revenue is maximized when selling an additional unit won’t increase your revenue, or in math terms, when MR = 0.)

CEO’s proposal: she keeps 20% of TR.

Firm price:
Firm output:
Total revenue:
Firm profit:
CEO compensation:
Remaining profit for owners:

Owners’ proposal: CEO keeps 10% of TR.

Firm price:
Firm output:
Total revenue:
Firm profit:
CEO compensation:
Remaining profit for owners:

2.    Suppose you are asked to mediate in the negotiations. Can you propose an incentive-based compensation scheme for the CEO that both parties are likely to accept, assuming everyone would like to maximize their income?

Your proposal:

Demonstration that everyone is better off than under their own proposal and thus should accept your proposal:

Firm price:
Firm output:
Total revenue:
Firm profit:
CEO compensation:
Remaining profit for owners:

3.    Now thinking even more shrewdly: what’s the maximum price you could charge for your consulting services and still leave everyone better off?

$

Hana Ltd. is a producer and importer of freshly cut flowers based in the country side village of Tagus. It has made a name for from its gerberas, roses, carnations, and tulips, although the portfolio includes a

range of itself other products. Tulips and some special flowers are imported from the Netherlands. Products are sold at its premises to florists, in the trade market to wholesalers and retailers, and directly to a large retail chain. The market for fresh flowers is very competitive, with significant pressure over prices. There is

high seasonality in supply (e.g. spring and early summer) and demand (e.g. Valentine’s Day, Mother’s Day, Christmas). When there is a significant mismatch between those supply and demand, prices can fluctuate widely, from ‘rock bottom’ prices that do not cover production costs to ‘sky high’ prices that make very generous profit margins. In addition to price, the market values highly product freshness, reliability of supply, speed of delivery, and range products available (including color variations).

The company owns part of its productive land and part of it is on a long-term land lease. All production of flowers is carried out in a series of greenhouses that Hana built and fully owns. Flower production facilities (greenhouses) are fitted with temperature and humidity control equipment that automatically opens the greenhouses to air circulation when temperature is too high and heats it up when the temperature is too low. The company uses its own two tractors to plough the land and to haul

trailers. The trailers carry fertilizers, seedlings for planting, and occasionally pesticides to the greenhouses. The plants, seedlings, shrubs, and bulbs planted by Hana are mostly imported to ensure the highest quality, productivity, and diversity of color variations. The trailers also carry freshly cut flowers back from the greenhouses to the processing and packing facility (as well as the green waste that is sent to a local dump). After processing and packaging, products are kept in one of three refrigeration units to prolong the life of flowers.

1

Hana currently employs 70 full-time staff, which represents the double of its size just four years ago. The company’s manager and founder, Mr Ting Tong, is an entrepreneur with twenty years of work experience in the sector but no training in management. He is directly assisted by his wife, Mrs Ming Tong, who manages the sales office and inventories. Like her husband, she has no formal training in management, but she is extremely energetic and outstanding in dealing with customers, a true asset to the company. Hana has a dedicated team of three salespersons working in the office at its premises, one accountant, two distribution employees, one foreman and one forewoman. The remaining employees work in the production, processing, and packaging of flowers, making flower production a labor- intensive activity. During peak times of production, part-time employees are hired on a need basis and on-going staff is paid for overtime work. All of the company’s employees are paid a fixed salary, plus any extras from overtime work.

The main building where the company operates houses the all administrative staff, the sales office, a product display area, the processing and packaging facility, and the refrigeration units. Workers are moved to and from the company’s main building, as well as between greenhouses, using two fully owned mini-vans. The company also uses its own fleet of three trucks (with cooling) to distribute products to customers and to take production to the trade market.

The company’s growth has created difficulties to Mr Tong in ensuring the timely payments to employees and suppliers. He is also finding a bit overwhelming to have a feel for how the company is doing, now that the scale of operations has grown to an unprecedented level. At the moment, there is no formal planning in the company; only rough estimates of revenues and the main cost items are prepared by Mr T o n g in his paper notebook. The company’s accountant role has been that of dealing with financial accounting matters and ensuring the company meets its legal tax obligations.

Another issue that Hana currently faces is the management of sales of products in short supply. These products cannot be sold to the first customer that comes through the door, but rather they need to be meticulously managed so that the orders from regular customers can be at least partially satisfied. Mrs Tong noted that the salespersons, who have been informally assigned to specific customers, frequently lacked an appreciation for this issue in their eagerness to meet their assigned customer’s requirements. No doubt Hana wanted a proactive sales team, but the sales push needed to be directed to products in good supply, not for those that can “sell for themselves”.

Required:

Using the detail in the case, describe how your chosen method of calculating product cost will be beneficial within HanaLtd.and have relevance to management.

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

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..................................................................

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