You have been asked to assist the management of Ironwood Corporation in arriving at certain decisions. Ironwood has its home office in Michigan and leases factory buildings in Wisconsin, Minnesota, and North Dakota, all of which produce the same product. Ironwood's management provided you with a projection of operations for next year, as follows. Total Wisconsin Minnesota North Dakota Sales revenue $ 870,000 $ 440,000 $ 273,000 $ 157,000 Fixed costs Factory 227,000 116,000 60,000 51,000 Administration 73,000 43,000 24,000 6,000 Variable costs 295,000 136,000 85,000 74,000 Allocated home office costs 100,000 45,000 35,000 20,000 Total $ 695,000 $ 340,000 $ 204,000 $ 151,000 Operating profit $ 175,000 $ 100,000 $ 69,000 $ 6,000 The sales price per unit is $5. Due to the marginal results of operations of the factory in North Dakota, Ironwood has decided to cease its operations and sell that factory's machinery and equipment by the end of this year. Ironwood expects that the proceeds from the sale of these assets would equal all termination costs. Ironwood, however, would like to continue serving most of its customers in that area if it is economically feasible and is considering one of the following three alternatives: • Expand the operations of the Minnesota factory by using space presently idle. This move would result in the following changes in that factory's operations. Increase over Minnesota factory's current operations Sales revenue 49 % Fixed costs Factory 18 Administration 11 Under this proposal, variable costs would be $2 per unit sold. • Enter into a long-term contract with a competitor that will serve that area's customers. This competitor would pay Ironwood a royalty of $0.8 per unit based on an estimate of 32,000 units being sold. • Close the North Dakota factory and not expand the operations of the Minnesota factory. Total home office costs of $100,000 will remain the same under each situation. Required: To assist the management of Ironwood Corporation, complete the following schedule computing Ironwood's estimated operating profit from each of the following options: a. Expansion of the Minnesota factory. b. Negotiation of the long-term contract on a royalty basis. c. Shutdown of the North Dakota operations with no expansion at other locations.

You have been asked to assist the management of Ironwood Corporation in arriving at certain decisions. Ironwood has its home office in Michigan and leases factory buildings in Wisconsin, Minnesota, and North Dakota, all of which produce the same product. Ironwood's management provided you with a projection of operations for next year, as follows. Total Wisconsin Minnesota North Dakota Sales revenue $ 870,000 $ 440,000 $ 273,000 $ 157,000 Fixed costs Factory 227,000 116,000 60,000 51,000 Administration 73,000 43,000 24,000 6,000 Variable costs 295,000 136,000 85,000 74,000 Allocated home office costs 100,000 45,000 35,000 20,000 Total $ 695,000 $ 340,000 $ 204,000 $ 151,000 Operating profit $ 175,000 $ 100,000 $ 69,000 $ 6,000 The sales price per unit is $5. Due to the marginal results of operations of the factory in North Dakota, Ironwood has decided to cease its operations and sell that factory's machinery and equipment by the end of this year. Ironwood expects that the proceeds from the sale of these assets would equal all termination costs. Ironwood, however, would like to continue serving most of its customers in that area if it is economically feasible and is considering one of the following three alternatives: • Expand the operations of the Minnesota factory by using space presently idle. This move would result in the following changes in that factory's operations. Increase over Minnesota factory's current operations Sales revenue 49 % Fixed costs Factory 18 Administration 11 Under this proposal, variable costs would be $2 per unit sold. • Enter into a long-term contract with a competitor that will serve that area's customers. This competitor would pay Ironwood a royalty of $0.8 per unit based on an estimate of 32,000 units being sold. • Close the North Dakota factory and not expand the operations of the Minnesota factory. Total home office costs of $100,000 will remain the same under each situation. Required: To assist the management of Ironwood Corporation, complete the following schedule computing Ironwood's estimated operating profit from each of the following options: a. Expansion of the Minnesota factory. b. Negotiation of the long-term contract on a royalty basis. c. Shutdown of the North Dakota operations with no expansion at other locations.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 37P: Katayama Company produces a variety of products. One division makes neoprene wetsuits. The divisions...

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	Total	Wisconsin	Minnesota	North Dakota
Sales revenue	$	870,000		$	440,000	$	273,000	$	157,000
Fixed costs
Factory		227,000			116,000		60,000		51,000
Administration		73,000			43,000		24,000		6,000
Variable costs		295,000			136,000		85,000		74,000
Allocated home office costs		100,000			45,000		35,000		20,000
Total	$	695,000		$	340,000	$	204,000	$	151,000
Operating profit	$	175,000		$	100,000	$	69,000	$	6,000

The sales price per unit is $5.

Due to the marginal results of operations of the factory in North Dakota, Ironwood has decided to cease its operations and sell that factory's machinery and equipment by the end of this year. Ironwood expects that the proceeds from the sale of these assets would equal all termination costs. Ironwood, however, would like to continue serving most of its customers in that area if it is economically feasible and is considering one of the following three alternatives:

• Expand the operations of the Minnesota factory by using space presently idle. This move would result in the following changes in that factory's operations.

Increase over Minnesota factory's current operations
Sales revenue	49	%
Fixed costs
Factory	18
Administration	11

Under this proposal, variable costs would be $2 per unit sold.

• Enter into a long-term contract with a competitor that will serve that area's customers. This competitor would pay Ironwood a royalty of $0.8 per unit based on an estimate of 32,000 units being sold.

• Close the North Dakota factory and not expand the operations of the Minnesota factory.

Total home office costs of $100,000 will remain the same under each situation.

Required:

To assist the management of Ironwood Corporation, complete the following schedule computing Ironwood's estimated operating profit from each of the following options:

a. Expansion of the Minnesota factory.

b. Negotiation of the long-term contract on a royalty basis.

c. Shutdown of the North Dakota operations with no expansion at other locations.

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