Please help me with questions 1-3 (Especially the third question).
On the first question: is my calculation correct that closing the Clayton plant would increase the company's profits? Should we close the factory?
Rainer-es.- Why is Clayton's facility expense so high? It's a smaller facility than either Billings or Great Falls and yet its facility expense is higher. nishes\" 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 inexperienwd at this kind ofworltand in fact went bankrupt before the project was completed. After hiring another contractor to nish the work, we were way over budget. The large depreciation charges on the facility didn't matter at rst because we didn't have much competition at the time and could charge premium prices. Rom: Well we can't do that anymore. The Clayton facility will obviously have to be shut down. Its business can be shifted to the othertwo check processing centers in the region. Mebm: I would advise against that. The $1,100,000 in facility depreciation at the Clayton location is misleading. That facility should last indenitely with proper maintenance. And it has no resale value; then: is no other commercial activity around Clayton. Roms: What about the other costs at Clayton? mm. [f 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 overhead costs. We might save $90,000 or so in local administntive expense, but we would not save any regional administrative 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 $000000 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. Romans: I understand all of that. but a money-losing processing center on my performance report is completely unacceptable. [Elem And if you shut down Clayton. you are going to throw some loyal employer: out of work. Rom: 'Ihat's unfortunate, but we have to face hard business realities. Balsam: And you would have to write off the investment in the facilities at Clayton. Roms: I can explain a writeoff to corporate headquarters; hiring an inexperienced contrac tor 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 centem. Clayton has to go. At the next corporate board meeting, I am going to recommend the Clayton facility I; I :-'-_l 1. From the standpoint of the company as a whole. what is the nancial advantage (disadvan- tage) of closing the Clayton processing center and redistributing its work to other processing centers in the region? Explain. Why might it be in Haley Romems's self-inLeIest to shut down the Clayton facility? Do you think Haley Romeros is conducting herself in an ethical fashion? Explain. What inuence should the depreciation on the facilities at Clayton have on price; charged by Clayton for its services
