CASE ANALYSIS

IN
MAS 2

CASE 14-32
Q. 1 From the standpoint of the company as a whole, should be the processing
center be shut down and its work redistributed to other processing centers in the
region? Explain.

Answer Financial Performance

After Shutting Down The Clayton Facility
Rocky Mountain Region

Revenues 50,000,000

Operating Expense:
Direct labor 32,000,000
Variable Overhead 850,000
Equipment Depreciation 3,900,000
Facility Expenses* 2,200,000
Local Administrative Expenses** 360,000
Corporate Administrative Expenses 4,750,000 (44,060,000)
Net Operation Income 5,940,000.00

Facility Expenses* 2,800,000 Local Administrative expenses** 450,000

Rent expense 600,000 Saves after shutting down (90,000)
Less: Depreciation (1,200,000) Local Administrative expenses 360,000
Facility expense 2,200,000 After Shutting down
After Shutting down

Explanation: The Clayton Facility should be shut down because of the unavoidable
higher rent expense of 600,000 a year and can no longer compete with other
competitor. In this case, it is like the Nokia tragedy that leads them a surprise loss
due to upgradable competitor that changes the taste and preference of the
consumer. In comparison the Clayton facility the profit trend before is good but
somehow in this year the Clayton Facility receive a net loss at the end of the year.

The computation above had shown an increase of Net operating income of

58.4% (5,940,000/3,750,000) after shutting down the Clayton Facility. This the
company will gain much more than the Clayton Facility remains in the operation.

Q. 2 Do you think Haley Romeros’s decision to shown down the Clayton Facility is
 Ethical? Explain

Answer:

If the Clayton Facility is shut down, Bank Services Corporation (BSC)’s profits
will decline, the employees will lose their jobs and customers will be affected of
decrease in services provided by BSC. Therefore, Romeros is willing to sacrifice the
interest of the company, its employees and its customers just to make his
performance look better.

Though Romeros is not a management accountant, the Ethical Standards of

Management Accounts is still beneficial. By recommending the closing of Clayton
Facility, Romeros will have to violate the credibility standard which requires the
disclosure of all relevant information that could reasonably be expected to influence
an intended users’ understanding of the reports, analysis or recommendation.

In Addition it is difficult to describe the recommendation to close the Clayton

Facility ethical behaviour. However, it is not fair to hold him responsible for the
mistake made by his predecessor.

The arbitrary allocation of corporate and regional administrative expenses, to

processing centers may make other processing centers appear to be unprofitable
even though they are not. The problem created by these arbitrary allocations were
compounded by using an irrelevant facilities expense.

Q3. What influence should the depreciation on the facilities at Clayton have on prices
charged by Clayton for its services?

Answer:

Prices should be set ignoring the depreciation on Clayton Facility. The real
cost of using Clayton Facility at this point is zero. Any attempt to recover the sunk
cost of the original cost of the building by charging higher prices than the market will
bear that lead to less business and lower profits.