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 regions 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 Total Billings Great Falls Clayton Sales 20,000,000 8,000,000 9,000,000 3,000,000 Operating expenses Direct labor 11,500,000 4,500,000 5,400,000 1,600,000 Variable overhead 443,000 180,000 170,000 93,000 Equipment depreciation 2,252,000 951,000 901,000 400,000 Facility expense 2,560,000 890,000 690,000 980,000 Local administrative expense 441,000 147,000 177,000 117,000 Regional administrative expense 500,000 200,000 225,000 75,000 Corporate administrative expense 1,600,000 640,000 720,000 240,000 Total operating expense 19,296,000 7,508,000 8,283,000 3,505,000 Net operating income (loss) 704,000 492,000 717,000 (505,000) Local administrative expenses are the administrative expenses incurred at the check processing centers Regional 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 8 of their sales Upon seeing this report, Ms Romeros summoned John Littlebear for an explanation Romeros Whats the story on Clayton It didnt have a loss the previous year did it Littlebear No, the Clayton facility has had a nice profit every year since it was opened six years ago, but Clayton lost a big contract this year Romeros Why Littlebear One of our national competitors entered the local market and bid very aggressively on the contract We couldnt afford to meet the bid Claytons costsparticularly their facility expenses are just too high When Clayton lost the contract, we had to lay off a lot of employees, but we could not reduce the fixed costs of the Clayton facility Romeros Why is Claytons facility expense so high Its a smaller facility than either Billings or Great Falls and yet its facility expense is higher Littlebear The problem is that we are able to rent suitable facilities very cheaply at Billings and Great Falls No such facilities were available at Clayton 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 didnt matter at first because we didnt have much competition at the time and could charge premium prices Romeros Well we cant do that anymore The Clayton facility will obviously have to be shut down Its business can be shifted to the other two check processing centers in the region Littlebear I would advise against that The $980,000 in depreciation at the Clayton facility is misleading That facility should last indefinitely with proper maintenance And it has no resale value there is no other commercial activity around Clayton Romeros What about the other costs at Clayton Littlebear If we shifted Claytons business over to the other two processing centers in the region, we wouldnt save anything on direct labor or variable overhead costs We might save $63,000 or so in local administrative expense, but we would not save any regional administrative expense and corporate headquarters would still charge us 8 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 $430,000 a year And dont forget that it will cost us something to move the equipment from Clayton to Billings and Great Falls 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 Littlebear And if you shut down Clayton, you are going to throw some loyal employees out of work Romeros Thats unfortunate, but we have to face hard business realities Littlebear And you would have to write off the investment in the facilities at Clayton Romeros I can explain a write off to corporate headquarters hiring an inexperienced contractor to build the Clayton facility was my predecessors mistake But theyll have my head at headquarters if I show operating losses every year at one of my processing centers Clayton has to go At the next corporate board meeting, I am going to recommend that the Clayton facility be closed Required 1 a What costs and benefits are relevant in the decision to shut down the Clayton facility (Enter decreases or reductions with a minus sign ) decrease in local administrative expenses, decrease in rent at Billings and Great Falls, increase in local administrative expenses, increase in rent at Billings and Great Falls, net decrease in costs, net increase in costs 1 b What is the impact on overall profits of FSC if Clayton Processing center is shut down Profits will increase profits will decline 1 c What would be the net operating income of Rocky Mountain Region if Clayton Processing center is shut down Note Ignore the costs of moving equipment and potential loss of revenues Total Sales Selling and administrative expenses Direct labor Variable overhead Equipment depreciation Facility expense Local administrative expense Regional administrative expense Corporate administrative expense Total operating expense Net operating income 1 d What is the impact on performance of Rocky Mountain Region if Clayton Processing is shut down Note Ignore the costs of moving equipment and potential loss of revenues Performance will decline performance will improve

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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

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 regions 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:

	Total	Billings	Great Falls	Clayton
Sales	20,000,000	8,000,000	9,000,000	3,000,000

Operating expenses:
Direct labor	11,500,000	4,500,000	5,400,000	1,600,000
Variable overhead	443,000	180,000	170,000	93,000
Equipment depreciation	2,252,000	951,000	901,000	400,000
Facility expense	2,560,000	890,000	690,000	980,000
Local administrative expense*	441,000	147,000	177,000	117,000
Regional administrative expense	500,000	200,000	225,000	75,000
Corporate administrative expense	1,600,000	640,000	720,000	240,000

Total operating expense	19,296,000	7,508,000	8,283,000	3,505,000

Net operating income (loss)	704,000	492,000	717,000	(505,000)

*Local administrative expenses are the administrative expenses incurred at the check processing centers.

Regional 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 8% of their sales.

Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanation.

Romeros:	Whats the story on Clayton? It didnt have a loss the previous year did it?
Littlebear:	No, the Clayton facility has had a nice profit every year since it was opened six years ago, but Clayton lost a big contract this year.
Romeros:	Why?
Littlebear:	One of our national competitors entered the local market and bid very aggressively on the contract. We couldnt afford to meet the bid. Claytons costsparticularly their facility expenses are just too high. When Clayton lost the contract, we had to lay off a lot of employees, but we could not reduce the fixed costs of the Clayton facility.
Romeros:	Why is Claytons facility expense so high? Its a smaller facility than either Billings or Great Falls and yet its facility expense is higher.
Littlebear:	The problem is that we are able to rent suitable facilities very cheaply at Billings and Great Falls. No such facilities were available at Clayton; 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 didnt matter at first because we didnt have much competition at the time and could charge premium prices.
Romeros:	Well we cant do that anymore. The Clayton facility will obviously have to be shut down. Its business can be shifted to the other two check processing centers in the region.
Littlebear:	I would advise against that. The $980,000 in depreciation at the Clayton facility is misleading. That facility should last indefinitely with proper maintenance. And it has no resale value; there is no other commercial activity around Clayton.
Romeros:	What about the other costs at Clayton?
Littlebear:	If we shifted Claytons business over to the other two processing centers in the region, we wouldnt save anything on direct labor or variable overhead costs. We might save $63,000 or so in local administrative expense, but we would not save any regional administrative expense and corporate headquarters would still charge us 8% 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 $430,000 a year. And dont forget that it will cost us something to move the equipment from Clayton to Billings and Great Falls. 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.
Littlebear:	And if you shut down Clayton, you are going to throw some loyal employees out of work.
Romeros:	Thats unfortunate, but we have to face hard business realities.
Littlebear:	And you would have to write off the investment in the facilities at Clayton.
Romeros:	I can explain a write-off to corporate headquarters; hiring an inexperienced contractor to build the Clayton facility was my predecessors mistake. But theyll have my head at headquarters if I show operating losses every year at one of my processing centers. Clayton has to go. At the next corporate board meeting, I am going to recommend that the Clayton facility be closed.

Required:

1-a.

What costs and benefits are relevant in the decision to shut down the Clayton facility? (Enter decreases or reductions with a minus sign.)

*	??
*	??
*

* decrease in local administrative expenses, decrease in rent at Billings and Great Falls, increase in local administrative expenses, increase in rent at Billings and Great Falls, net decrease in costs, net increase in costs?

1-b.

What is the impact on overall profits of FSC if Clayton Processing center is shut down?

Profits will increase/ profits will decline?

1-c.

What would be the net operating income of Rocky Mountain Region if Clayton Processing center is shut down? Note: Ignore the costs of moving equipment and potential loss of revenues.

	Total
Sales
Selling and administrative expenses:
Direct labor
Variable overhead
Equipment depreciation
Facility expense
Local administrative expense
Regional administrative expense
Corporate administrative expense
Total operating expense
Net operating income

1-d.	What is the impact on performance of Rocky Mountain Region if Clayton Processing is shut down? Note: Ignore the costs of moving equipment and potential loss of revenues. Performance will decline/ performance will improve?