(Product line) You have been hired to assist the management of Posture Perfect Chair Company in resolving certain issues. Posture Perfect has its home office in Tennessee and leases facilities in Tennessee, Georgia, and Florida, where it produces a high-quality bean bag chair designed for resi¬ dential use. Posture Perfect management has provided you a projection of operations for fiscal 2007, the forthcoming year, as follows:

The sales price per unit is $50.
Due to the marginal results of operations in Florida, Posture Perfect has decided to cease its operations there and sell that factory’s machinery and equipment by the end of 2007. Managers expect proceeds from the sale of these assets to exceed their book value by enough to cover termination costs.

However, Posture Perfect would like to continue serving its customers in that area if it is economically feasible. It is considering the following three alternatives:
1. Expand the operations of the Georgia factory by using space that is cur¬ rently idle. This move would result in the following changes in that fac¬ tory’s operations:

Under this proposal, variable costs would be $16 per unit sold.
2. Enter into a long-term contract with a competitor who will serve that area’s customers and will pay Posture Perfect a royalty of $8 per unit based on an estimate of 30,000 units being sold.
3. Close the Florida factory and not expand the operations of the Georgia factory.
"'Total home office costs of $500,000 will remain the same under each situa¬ tion.
To assist the company’s management in determining which alternative is most economically feasible, prepare a schedule computing its estimated pre¬ tax profit from total operations that would result from each of the following methods:

a. Expansion of the Georgia factory.

b. Negotiation of a long-term contract on a royalty basis.
C. Close the Florida operations with no expansion at other locations.
(AlCPA adapted)

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Total Tennessee Sales $ 8,800,000 $ 4,400,000 Fixed costs Factory $ 2,200,000 700,000 Administration Variable costs Allocated home office costs Total costs Pre-tax profit from operations 2,900,000 1,000,000 $(6,800,000) $ 1,120,000 420,000 1,330,000 450,000 $(3,320,000) $ 2,000,000 $ 1,080,000 Georgia $ 2,800,000 $ 560,000 220,000 850,000 350,000 $(1,980,000) $ 820,000 Florida $ 1,600,000 $ 520,000 60,000 720,000 200,000 $(1,500,000) $ 100,000