Louisville Jar Co. has processing plants in Kentucky and Pennsylvania. Both plants use recycled glass to produce jars that a variety of food processors use in food canning. The jars sell for $10 per hundred units. Budgeted revenues and costs for the year ending December 31, 2014, in thousands of dollars, are:

	Kentucky	Pennsylvania	Total
Sales	$1,100	$2,000	$3,100
Variable production costs:
Direct material	275	500	775
Direct labor	330	500	830
Factory overhead	220	350	570
Fixed factory overhead	350	450	800
Fixed regional promotional costs	50	50	100
Allocated home office costs	55	100	155
Total costs	1280	1950	3230
Operating income (loss) before tax	($180)	$50	($130)

Home office costs are fixed and are allocated to manufacturing plants on the basis of relative sales levels. Fixed regional promotional costs are discretionary advertising costs needed to obtain budgeted sales levels.

Because of the budgeted operating loss, Louisville Jar Co. is considering ceasing operations at its Kentucky plant. If it does so, proceeds from the sale of plant assets will exceed asset book values and exactly cover all termination costs; fixed factory overhead costs of $25,000 would not be eliminated. Louisville Jar Co. Louisville Jar Co. is considering the following plan, solve for operating income (show your work):

Plan:

Close the Kentucky plant and enter into a long-term contract with a competitor to serve the Kentucky region's customers. This competitor would pay a royalty of $1.25 per 100 units sold to Louisville, which would continue to incur fixed regional promotional costs to maintain sales of 11,000,000 units in the Kentucky region.

Particulars	Kentucky	Pennsylvania	Total
Sales
Royalty Revenue
Variable Costs:
Direct Material
Direct Labor
Factory Overhead
Contribution Margin
Direct Fixed Costs:
Overhead
Promotion Costs
Allocated Fixed Costs
Operating Income (Loss)