Question: You have been hired to assist the
You have been hired to assist the management of Great Bend Office Systems in resolving certain issues. The company has its home office in Montana and leases facilities in Montana, Idaho, and North Dakota, where it produces a high-quality bean bag chair designed for residential use. Great Bend management has provided you a projection of operations for fiscal 2011, the forthcoming year, as follows: 
The sales price per unit is $100. Due to the marginal results of operations in North Dakota, Great Bend has decided to cease its operations there and sell that factory’s machinery and equipment by the end of 2011. Managers expect proceeds from the sale of these assets to exceed their book value by enough to cover termination costs. However, Great Bend would like to continue serving its customers in that area if it is economically feasible. It is considering the following three alternatives: 1. Expand the operations of the Idaho factory by using space that is currently idle. This move would result in the following changes in that factory’s operations: Increase over Factory’s Current Operations Sales ………………………………………………..50% Fixed costs Factory ……………………………………………..20% Administration …………………………………10% Under this proposal, variable costs would be $32 per unit sold. 2. Enter into a long-term contract with a competitor who will serve that area’s customers and will pay Great Bend a royalty of $16 per unit based on an estimate of 30,000 units being sold. 3. Close the North Dakota factory and not expand the operations of the Idaho factory. Note: Total home office costs of $2,000,000 will remain the same under each situation. To assist the company’s management in determining which alternative is most economically feasible, prepare a schedule computing its estimated pre-tax profit from total operations that would result from each of the following alternative: a. Expansion of the Idaho factory. b. Negotiation of a long-term contract on a royalty basis. c. Closure of the North Dakota operations with no expansion at other locations.
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Total Montana Idaho North Dakota $ 17,600,000 $ 8,800,000 $ 5,600,000 $ 3,200,000 Sales Fixed costs $ 4,400,000 $ 240,000 $ 1,120,000 840,000 Factory $ 1,040,000 Administration 1,400,000 440,000 120,000 Variable costs 5,800,000 2,660,000 1,700,000 1,440,000 Allocated home office costs 2,000,000 900,000 700,000 400,000 $ (3,000,000) $ 200,000 Total costs $(13,600,000) $(6,640,000) $(3,960,000) Pre-tax profit from operations $ 4,000,000 $ 2,160,000 $ 1,640,000
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