Differential Costs and CVP Analysis: You have been asked to assist the management of Arcadia Corporation in
Question:
Differential Costs and CVP Analysis: You have been asked to assist the management of Arcadia Corporation in arriving at certain decisions. Arcadia has its home office in Ohio and leases factory buildings in Texas, Montana, and Maine, all of which produce the same product. The management of Arcadia provided you with a projection of operations for next year, as follows:
The sales price per unit is $25.
Due to the marginal results of operations of the factory in Maine, Arcadia has decided to cease operations and sell that factory's machinery and equipment by the end of this year. Arcadia expects that the proceeds from the sale of these assets would be greater than their book value and would cover all termination costs. Arcadia, however, would like to continue serving its customers in that area if it is economically feasible and is considering one of the following three alternatives:
1. Expand the operations of the Montana factory by using space presently idle. This move would result in the following changes in that factory's operations:
Under this proposal, variable costs would be $8 per unit sold.
2. Enter into a long-term contract with a competitor who will serve that area's customers. This competitor would pay Arcadia a royalty of $4 per unit based on an estimate of 30,000 units being sold.
3. Close the Maine factory and not expand the operations of the Montana factory. Total home office costs of $500,000 will remain the same under each situation.
Required:
To assist the management of Arcadia Corporation, prepare a schedule computing Arcadia's estimated operating profit from each of the following options:
a. Expansion of the Montana factory
b. Negotiation of long-term contract on a royalty basis.
c. Shutdown of Maine operations with no expansion at other locations.
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