Haley Platt had just been appointed CEO of the North Region of the Bank Services Corporation (BSC). The company provides cheque-processing services for European banks. The banks send cheques presented for deposit or payment to BSC, which records the data on each cheque in a computerized database. BSC then sends the data electronically to the nearest bank cheque-clearing centre, where the appropriate transfers of funds are made between banks. The North Region has three cheque-processing centres, which are located in Billingham, Grantham and Cleethorpes. Prior to her promotion to CEO, Ms Platt had been the manager of a cheque-processing centre in Mansfield. Immediately upon assuming her new position, Ms Platt requested a complete financial report for the justended fiscal year from the region’s controller, John Littlebear. Ms Platt specified that the financial report should follow the standardized format required by corporate headquarters for all regional performance reports. That report follows:

Upon seeing this report, Ms Platt summoned John Littlebear for an explanation.
Platt: What’s the story on Cleethorpes? It didn’t have a loss the previous year did it? Littlebear: No, the Cleethorpes facility has had a nice profit every year since it was opened six years ago, but Cleethorpes lost a big contract this year.
Platt: Why?
Littlebear: One of our national competitors entered the local market and bid very aggressively on the contract. We couldn’t afford to meet the bid. Cleethorpes’ costs – particularly its facility expenses – are just too high. When Cleethorpes lost the contract, we had to lay off a lot of employees, but we could not reduce the fixed costs of the Cleethorpes facility.
Platt: Why is Cleethorpes’ facility expense so high? It’s a smaller facility than either Billingham and Grantham and yet its facility expense is higher.
Littlebear: The problem is that we are able to rent suitable facilities very cheaply in Billingham and Grantham. No such facilities were available in Cleethorpes so we had them built. Unfortunately, there were big cost overruns. The contractor we hired was inexperienced at this kind of work and in fact went bankrupt before the project was completed. After hiring another contractor to finish the work we were way over budget. The large depreciation charges on the facility didn’t matter at first because we didn’t have much competition at the time and could charge premium prices.
Platt: Well we can’t do that anymore. The Cleethorpes facility will obviously have to be shut down. Its business can be shifted to the other two cheque-processing centres in the region.
Littlebear: I would advise against that. The £1,200,000 in depreciation at the Cleethorpes facility is misleading. That facility should last indefinitely with proper maintenance. And it has no resale value; there is no other commercial activity around Cleethorpes.
Platt: What about the other costs in Cleethorpes? Littlebear: If we shifted Cleethorpes’ business over to the other two processing centres in the region, we wouldn’t save anything on direct labour or variable overhead costs. We might save £90,000 or so in local administrative expense, but we would not save any regional administrative expense and corporate headquarters would still charge us 9.5% of our revenue as corporate administrative expense. In addition, we would have to rent more space in Billingham and Grantham in order to handle the work transferred from Cleethorpes; that would probably cost us at least £600,000 a year. And don’t forget that it will cost us something to move the equipment from Cleethorpes to Billingham and Grantham. And the move will disrupt service to customers.
Platt: I understand all of that, but a money-losing processing centre on my performance report is completely unacceptable.
Littlebear: And if you shut down Cleethorpes, you are going to throw some loyal employees out of work.
Platt: That’s unfortunate, but we have to face hard business realities.
Littlebear: And you would have to write off the investment in the facilities in Cleethorpes.
Platt: I can explain a write-off to corporate headquarters; hiring an inexperienced contractor to build the Cleethorpes facility was my predecessor’s mistake. But they’ll have my head at headquarters if I show operating losses every year at one of my processing centres. Cleethorpes has to go. At the next corporate board meeting, I am going to recommend that the Cleethorpes facility be closed.

Required
1. From the standpoint of the company as a whole, should the Cleethorpes processing centre be shut down and its work redistributed to other processing centres in the region? Explain.
2. Do you think Haley Platt’s decision to shut down the Cleethorpes facility is ethical? Explain.
3. What influence should the depreciation on the facilities in Cleethorpes have on prices charged by Cleethorpes for its services?

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Revenue Operating expenses: Direct labour Variable overhead Equipment depreciation Facility expense Local administrative expense* Regional administrative expense* Corporate administrative expense* Total operating expense Operating profit Bank Services Corporation (BSC) North Region financial performance Total £50,000,000 32,000,000 850,000 3,900,000 2,800,000 450,000 1,500,000 4,750,000 46,250,000 £3,750,000 Cheque-processing centres Billingham Grantham Cleethorpes £20,000,000 £18,000,000 £12,000,000 12,500,000 350,000 1,300,000 900,000 140,000 600,000 1,900,000 17,690,000 £2,310,000 11,000,000 310,000 1,400,000 800,000 160,000 540,000 1,710,000 15,920,000 £2,080,000 8,500,000 190,000 1,200,000 1,100,000 150,000 360,000 1,140,000 12,640,000 £(640,000) *Local administrative expenses are the administrative expenses incurred at the cheque-processing centres. *Regional administrative expenses are allocated to the cheque-processing centres based on sales. *Corporate administrative expenses are charged to segments of the company such as the North Region and the cheque- processing centres at the rate of 9.5% of their sales.