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 or payment to BSC, which records the data on each check in a banks end checks presented for deposi 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 bank 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 manage of a check processing center in New Jersey mmediately after assuming her new position, Ms. Romeros requested a complete financial report fo 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 Bank Services Corporation (BSC Rocky Mountain Region Financial Perfomance Check Processing Centers Total Billings Great Falls Clayton Sales 20.000.000 $7.000.000 8.000.000 5.000.000 Operating expenses Direct 2.100.000 4.000.000 5.000.000 3.100.000 abo Variable overhead 431.000 68.000 58.000 05.000 2.248.000 699.000 799.000 750.000 Equipment depreciation Facility expense 2.200.000 770.000 570.000 860.000 35.000 65.000 Local administrative expense 405.000 05.000 Regional administrative expenset 360.000 26.000 44.000 90.000 Corporate administrative expensel 600.000 560.000 640.000 400.000 Total operating expens 7.476.000 19,344,000 6.458.000 5.410.000 Net operating income lloss 656,000 542,000 524,000 S (410,000 "Local administrative expenses are the administrative expenses incumed at the check processing centers. tRegional administrative expenses are allocated to the check processing centers based on sales 1Corporate 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: What's e story on Clayton? didn' loss the previous year did it? ave a Littlebear: No. e Clayton facility has had a nice profit every year since was opened six years ago. but Clayton lost a big contract this yea Romeros: 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 Clayton's costs-particularly 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 Clayton's facility expense so high? s a smaller facility than either Billings or Great Falls and yet its facility expense is highe Littlebear: The problem is that we are able to rent suitable facilities very cheaply at Billings and Great Falls. No such fac es were available at Clayton, we had them bui Unfortunately, there were big cost ovemuns. 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' matter at first because we didn't have much competition at the time and could charge premium price Romeros: Well we can't do that anymore. The Clayton facility wi obviously have to be shut down. business can be shifted to the othe wo check processing centers in the region. Littlebear would advise against that. The S860,000 in depreciation at the Clayton facility is misleading. That facility should las ndefinitely with proper maintenance. And it has no resale value; there s no other commercial activity around Clayton. Romeros: What about the other costs at Clayton? Littlebear: If we shifted Clayton's business over to the other two processing centers in the region, we wouldn hin g on direct abor or variable overhead costs. We might save $57,000 or save any so in local administrative expense, but we would not save any regional administrati ive expense and corporate headquarters would s charge us 8 of our sales as corporate administrative expense n addition, we would have to rent more space in Billings and Great Falls in order to handle he work transferred from Clayton; that would probably cost us a east $370,000 a year And don't 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 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 wo Romeros: That's unfortunate, but we have to face hard business real es Littlebear: And you would have to vrite off the investment in the facilities at Clayton Romeros can explain a write-off to corporate headquarters; hiring an inexperienced contractor to build the Clayton 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 centers. Clayton ha to go. At the next corporate board meeting. am going to recommend that the Clayton facility be closed