4.99 See Answer

Question: Haley Romeros had just been appointed vice

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 banks send checks presented for deposit or payment to BSC, which records the data on eachcheck in a 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 betweenbanks. 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 manager of a check processing center in New Jersey. Immediately after assuming her new position, Ms. Romeros requested a complete financialreport for 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 corporateheadquarters for all regional performance reports. That report follows:
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 banks send checks presented for deposit or payment to BSC, which records the data on eachcheck in a 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 betweenbanks. 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 manager of a check processing center in New Jersey.

Immediately after assuming her new position, Ms. Romeros requested a complete financialreport for 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 corporateheadquarters for all regional performance reports. That report follows:

Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanation.
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 was 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 thecontract. We couldn’t afford to meet the bid. Clayton’s costs—particularly their facility expenses—arejust 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 GreatFalls and yet its facility expense is higher.
Littlebear: The problem is that we are able to rent suitable facilities very cheaply at Billings and GreatFalls. No such facilities were available at Clayton; we had them built. Unfortunately, there were bigcost overruns. The contractor we hired was inexperienced at this kind of work and in fact wentbankrupt before the project was completed. After hiring another contractor to finish the work, wewere way over budget. The large depreciation charges on the facility didn’t matter at first becausewe 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. Itsbusiness can be shifted to the other two check processing centers in the region.
Littlebear: I would advise against that. The $1,200,000 in depreciation at the Clayton facility 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 business over to the other two processing centers in the region, wewouldn’t save anything on direct labor or variable overhead costs. We might save $90,000 or so inlocal administrative expense, but we would not save any regional administrative expense and corporateheadquarters 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 handlethe work transferred from Clayton; that would probably cost us at least $600,000 a year. And don’tforget 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 iscompletely 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 tobuild the Clayton facility was my predecessor’s mistake. But they’ll have my head at headquartersif I show operating losses every year at one of my processing centers. Clayton has to go. At the nextcorporate board meeting, I am going to recommend that the Clayton facility be closed.

Required:
1. From the standpoint of the company as a whole, should the Clayton processing center be shut down and its work redistributed to other processing centers in the region? Explain.
2. Do you think Haley Romeros’s decision to shut down the Clayton facility is ethical? Explain.
3. What influence should the depreciation on the facilities at Clayton have on prices charged byClayton for its services?
Upon seeing this report, Ms. Romeros summoned John Littlebear for an explanation. 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 was 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 thecontract. We couldn’t afford to meet the bid. Clayton’s costs—particularly their facility expenses—arejust 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 GreatFalls and yet its facility expense is higher. Littlebear: The problem is that we are able to rent suitable facilities very cheaply at Billings and GreatFalls. No such facilities were available at Clayton; we had them built. Unfortunately, there were bigcost overruns. The contractor we hired was inexperienced at this kind of work and in fact wentbankrupt before the project was completed. After hiring another contractor to finish the work, wewere way over budget. The large depreciation charges on the facility didn’t matter at first becausewe 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. Itsbusiness can be shifted to the other two check processing centers in the region. Littlebear: I would advise against that. The $1,200,000 in depreciation at the Clayton facility 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 business over to the other two processing centers in the region, wewouldn’t save anything on direct labor or variable overhead costs. We might save $90,000 or so inlocal administrative expense, but we would not save any regional administrative expense and corporateheadquarters 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 handlethe work transferred from Clayton; that would probably cost us at least $600,000 a year. And don’tforget 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 iscompletely 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 tobuild the Clayton facility was my predecessor’s mistake. But they’ll have my head at headquartersif I show operating losses every year at one of my processing centers. Clayton has to go. At the nextcorporate board meeting, I am going to recommend that the Clayton facility be closed. Required: 1. From the standpoint of the company as a whole, should the Clayton processing center be shut down and its work redistributed to other processing centers in the region? Explain. 2. Do you think Haley Romeros’s decision to shut down the Clayton facility is ethical? Explain. 3. What influence should the depreciation on the facilities at Clayton have on prices charged byClayton for its services?





Transcribed Image Text:

Bank Services Corporation (BSC) Rocky Mountain Region Financial Performance Check Processing Centers Total Billings Great Falls Clayton Sales.. $50,000,000 $20,000,000 $18,000,000 $12.000,000 Operating expenses: Direct labor Variable overhead . Equipment depreciation. Facility expense. Local administrative expense". Regional administrative expense Corporate administrative expense'. 32,000,000 12,500,000 11,000,000 8,500,000 850,000 3,900,000 310,000 190,000 350,000 1,300,000 1,400,000 1,200,000 2,800,000 800,000 900,000 140,000 1,100,000 450,000 160,000 150,000 1,500,000 600,000 540,000 360,000 4,750,000 1,900,000 1.710,000 1,140,000 Total operating expense 46.250,000 17,690,000 15,920,000 12.640,000 Net operating income $ 3,750,000 $ 2,310,000 $ 2,080,000 $ (640,000) "Local 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.



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4.99

See Answer