CASE 6-30 Ethics and the Manager; Shut Down or Continue Operations LO6-2 Haley Romeros had just been appointed vice president of the Rocky Mountain Region of the Bank Services Corporation (BSC). The company provides check processing services for small banks. The banks send checks presented for deposit or payment to BSC, which records the data on each check in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center where the appropriate transfers of funds are made between banks. The Rocky Mountain Region has three check processing centers, which are located in Billings. Montana; Great Falls, Montana; and Clayton, Idaho. Prior to her promotion to vice president, Ms. Romeros had been the manager of a check processing center in New Jersey. Immediately after assuming her new position, Ms. Romeros requested a complete financial report for the just-ended fiscal year from the region's controller, John Littlebear. Ms. Romeros specified that the financial report should follow the standardized format required by corporate headquarters for all regional performance reports. That report follows: "Includes buiding rental expense for the Bilings and Great Falls locations and buliding depreciation for the Clayton location 'tocal administrative expenses are the administrative expenses incurred at the check processing centers. Tegoinal administrative expenses are allocated to the check processing centers based on sales. $ Corporate administrative expenses are charged to segments of the company such as the Rocky Mountain Region and the check processing centers at the rate of 9.5% of their sales. Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanwion. Romeros: What's the sory on Cliyylon? th dida't have a loss the previous year did in? Litrlebrar: No, the Clayton facility bas had a nice profit every year since it opened six year apa. but Clayton lost a big contract this year. Romeros: Why? Lirtlebear: One of our national competiton entered the local market and bid very augrean vely. on the contract. We couldn't afford to meet the bid. Claytoa's conts-particularly their facel. ity expenses-are just too high. When Clayton lost the contract, we had to Ly off a lor of employees, but we could not reduce the fixed costs of the Claytan facility. Romeros: Why is Clayon's facility expense so high? It's a smaller facility that elither Billines or Great Falts and yet its facility expense is higher. Litilebear: The problem is that we are able to rent suitable fucilities very cheaphy at Bullingas and Great Falls. No such facilities were available at Clayton; we had them builk. Unforturnately. 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 contracine to finish the work, we were way over budget. The large depreciation charget of the factiry didn't matter at first because we didn't have much competition at the time and coolid charge premium prices: Romeros: Well we can't do that anymore. The Clayton facility will obviously huve to be shur down. Its business can be shifted to the other two check processing centen in the repion. Litrlebear: I would advise against that. The $1,100,000 in facility depreciation at the Clayion location is misleading. That facility should last indefinitely with proper maintenance. And it has no resale value; there is no other commercial activify around Clayron. Romeros: What about the other costs at Clayton? Littlebear: If we shifted Clayton's sales over to the other two processing centers in the region. we wouldn't save anything on direct labor or variable overthead cocts. We might save $90,000 or so in local administrative expense, but we would not save ary regiocal adminicrative expense and corporate headquarters would still charge us 9.5% of our sales as corporate administrative expense. In addition, we would have to rent more space in Billings and Great Falls in order to handle the work transferred from Clayton: that would probably cost us at least $600000a year. And don't forget that it will cost us something to move the equipment from Clayton to Biltings and Great Falts, And the move will disrupt service to customers: Romeros: I understand all of that, but a money-losing processing center on my performance report is completely unacceptable. Litulebear: And if you shut down Clayton, you are going to throw some loyal employees out of work. Romeros: That's unfortunate, but we have to face hard bosiness realities. Litflebear: And you would have to write off the imvestment in the facilities at Clayton. Romrros: 1 can explain a write-off to corporate headquarters; hiring an inexperienced contractor to buitd the Chyton facility was my predecessor's mistake. But they'tl have my head at headcoarters if I show operating losses every year at one of my processing centers. Clayton bas. to go. At the next corporate board mecting, I am going to recommend the Clayton facility be closed. Required: Required: 1. From the standpoint of the company as a whole, what is the financial advantage (disadvat: tige) of closing the Clicyton processing center and redistributing its work to other processing centers in the region? Explain. 2. Why might it be in Haley Romeros's self-interest to shut down the Clayton facitity? Do you think Haley Romeros is conducting herself in an ethical fashion? Explain. 3. What influence should the depreciation on the facilities at Clayton have on prices charged by Clayton for its services