The Bank Services Corporation provides check processing services for small banks. Banks send checks for deposit or payment to BSC, which records the data in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center and 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. Ms. Romeros was recently promoted to vice president. Ms. Romeros requested a complete financial report for the just-ended fiscal year from the region's controller, John Littlebear. That report follows: Bank Services Corporation (BSC) Rocky Mountain Region Financial P formance Checks Processing Centers Total Billings Cat Falls Clayton $50.000.000 $20.000.000 $3.000.000 $12.000.000 Sales Operating een Direelabor DO 1.000 12.5 350.000 Variable overhead Equipment depreciatio 8.500.000 190 1.200.000 00.00 1 DO Pacality expense Leadmin expense 100.000 150.000 350 000 0.000 Financial Performance Check Processing Centers Total Billings Great Falls Clayton $50,000,000 $20,000,000 $ 18,000,000 $12,000,000 Sales Operating expenses: Direct labor 32,000,000 11,000,000 8,500,000 12,500,000 350,000 850,000 310,000 190,000 3,900,000 1,300,000 1,400,000 1,200,000 2,800,000 800,000 1,100,000 900,000 140,000 450,000 160,000 150,000 1,500,000 600,000 540,000 360.000 Variable overhead Equipment depreciatio n Facility expense Localadmin expense Regional admin expense Corporate admin expense Total operating expense Net operating inconie (loss) 4,750,000 1,900,000 1,710,000 1,140,000 46,250,000 17.690.000 15.920,000 12,640,000 $ 3,750,000 $ 2,310,000 $ 2,080,000 $ (640,000) *Includes building rental expense for the Billings and Great Falls locations and building depreciation for the Clayton location fLocal 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 9.5% of their sales. Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanation. Here is their conversation: Romeros:What's the story on Clayton? It didn't have a loss the previous year did it? Littlebear:No, the Clayton facility has had a nice profit every year since it 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 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? It's 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 didn't matter at first because we didn't have much competition at the time and could charge premium 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't matter at first because we didn't have much competition at the time and could charge premium prices. Romeros:Well we can't 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 $1,100,000 in facility depreciation at the Clayton location 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 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 administrative 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 $600,000 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: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:That's 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 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 has to go. At the next corporate board meeting, I am going to recommend the Clayton facility be closed. Required: 1. From the standpoint of the company as a whole, what is the financial advantage (disadvantage) of closing the Clayton processing center and redistributing its work to other processing centers in the region? Explain Styles 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 has to go. At the next corporate board meeting, I am going to recommend the Clayton facility be closed. Required: 1. From the standpoint of the company as a whole, what is the financial advantage (disadvantage) of closing the Clayton 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 facility? 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 The Bank Services Corporation provides check processing services for small banks. Banks send checks for deposit or payment to BSC, which records the data in a computerized database. BSC then sends the data electronically to the nearest Federal Reserve Bank check-clearing center and 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. Ms. Romeros was recently promoted to vice president. Ms. Romeros requested a complete financial report for the just-ended fiscal year from the region's controller, John Littlebear. That report follows: Bank Services Corporation (BSC) Rocky Mountain Region Financial P formance Checks Processing Centers Total Billings Cat Falls Clayton $50.000.000 $20.000.000 $3.000.000 $12.000.000 Sales Operating een Direelabor DO 1.000 12.5 350.000 Variable overhead Equipment depreciatio 8.500.000 190 1.200.000 00.00 1 DO Pacality expense Leadmin expense 100.000 150.000 350 000 0.000 Financial Performance Check Processing Centers Total Billings Great Falls Clayton $50,000,000 $20,000,000 $ 18,000,000 $12,000,000 Sales Operating expenses: Direct labor 32,000,000 11,000,000 8,500,000 12,500,000 350,000 850,000 310,000 190,000 3,900,000 1,300,000 1,400,000 1,200,000 2,800,000 800,000 1,100,000 900,000 140,000 450,000 160,000 150,000 1,500,000 600,000 540,000 360.000 Variable overhead Equipment depreciatio n Facility expense Localadmin expense Regional admin expense Corporate admin expense Total operating expense Net operating inconie (loss) 4,750,000 1,900,000 1,710,000 1,140,000 46,250,000 17.690.000 15.920,000 12,640,000 $ 3,750,000 $ 2,310,000 $ 2,080,000 $ (640,000) *Includes building rental expense for the Billings and Great Falls locations and building depreciation for the Clayton location fLocal 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 9.5% of their sales. Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanation. Here is their conversation: Romeros:What's the story on Clayton? It didn't have a loss the previous year did it? Littlebear:No, the Clayton facility has had a nice profit every year since it 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 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? It's 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 didn't matter at first because we didn't have much competition at the time and could charge premium 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't matter at first because we didn't have much competition at the time and could charge premium prices. Romeros:Well we can't 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 $1,100,000 in facility depreciation at the Clayton location 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 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 administrative 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 $600,000 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: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:That's 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 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 has to go. At the next corporate board meeting, I am going to recommend the Clayton facility be closed. Required: 1. From the standpoint of the company as a whole, what is the financial advantage (disadvantage) of closing the Clayton processing center and redistributing its work to other processing centers in the region? Explain Styles 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 has to go. At the next corporate board meeting, I am going to recommend the Clayton facility be closed. Required: 1. From the standpoint of the company as a whole, what is the financial advantage (disadvantage) of closing the Clayton 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 facility? 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