Assessment 1 Part 5: Closing a Plant Scenario: You have been asked to help Chase Corporation management make certain decisions. Chase has its home office in Oklahoma and leases factory buildings in Arkansas, Kansas, and Colorado, all of which produce the same product. Chase's management provided you the following projection of operations for next year: Chase Corporation Projections Total $968,000 Arkansas Kansas Colorado $484,000 $308,000 $176,000 Sales revenue Fixed costs: Factory Administration Variable costs Allocated home office costs Total Operating profit The sales price per unit is $5. $242,000 $123,200 $61,600 $57,200 77,000 46,200 24,200 6,600 319,000 146,300 93,500 110,000 49,500 38.500 $ 748,000.00 $ $220,000.00 $ 365,200.00 $ 118,800.00 217,800.00 $ $ 90,200 79,200 22,000 165,000.00 $ 11,000 Due to the marginal results of operations of the factory in Colorado, Chase has decided to cease operations and sell that factory's machinery and equipment by year end. Chase expects that proceeds from the sale of these assets would equal all termination costs. Chase 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: 23 Option A: Expand the operations of the Kansas factory by using idle space. This move would result in the 24 following changes in that factory's operations: 25 26 Increase over Kansas factory's current operations 27 Sales revenue 28 Fixed costs 29 Factory 30 B1 32 Under this proposal, variable costs would be $2 per unit sold. B3 Option B: 4 456 Enter into a long-term contract with a competitor that will serve that area's customers. This competitor would pay Chase a royalty of $1 per unit based on an estimate of 30,000 units being sold. 6 Option C: Close the Colorado factory and not expand the operations of the Kansas factory. Total home office costs of $110,000 will remain the same under each situation. 50% 20 39 REQUIRED 1. To assist the management of Chase Corporation, prepare a schedule computing Chase's estimated operating profit from each 40 of the following options: 41 42 Option A: Expansion of the Kansas factory. 43 44 45 46 47 48 49 50 51 52 53 54 Option B: Negotiation of the long-term contract on a royalty basis. Option C: Shutdown of the Colorado operations with no expansion at other locations. 52. Determine the best option for Chase Corporation and explain your rationale. B