16th EditionMadhav V Rajan, Srikant M. Datar1,008 explanations
15th EditionCharles T. Horngren, Srikant M. Datar850 explanations
16th EditionMadhav Rajan, Srikant M. Datar1,008 explanations
8th EditionJames F. Sepe, J. David Spiceland, Mark W. Nelson, Wayne Thomas1,790 explanations
ACCOUNTINGHaley 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 each check 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 between banks. 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. Intermediately after assuming her new position, Ms. Romeros requested a complete financial report 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 corporate headquarters 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 om 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 prices.
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\begin{matrix}
\text{Bank Services Corporation (BSC)}\\
\text{Rocky Mountain Region}\\
\text{Financial Performance}\\
\text{ } & \text{Check Processing Centers}\\
\text{ } & \text{Total} & \text{Billings} & \text{Great Falls} & \text{Clayton}\\
\text{Sales} & \text{\$ 50.000.000} & \text{\$ 20.000.000} & \text{\$ 18.000.000} & \text{\$ 12.000.000}\\
\text{Operating expenses:}\\
\text{Direct labor} & \text{32.000.000} & \text{12.500.000} & \text{11.000.000} & \text{8.500.000}\\
\text{Variable overhead} & \text{850.000} & \text{350.000} & \text{310.000} & \text{190.000}\\
\text{Equipment depreciation} & \text{3.900.000} & \text{1.300.000} & \text{1.400.000} & \text{1.200.000}\\
\text{Facility expense} & \text{2.800.000} & \text{900.000} & \text{800.000} & \text{1.100.000}\\
\text{Local administrative expense} & \text{450.000} & \text{140.000} & \text{160.000} & \text{150.000}\\
\text{Regional administrative expense} & \text{1.500.000} & \text{600.000} & \text{540.000} & \text{360.000}\\
\text{Corporate administrative expense} & \text{4.750.000} & \text{1.900.000} & \text{1.710.000} & \text{1.140.000}\\
\text{Total operating expense} & \text{46.250.000} & \text{17.690.000} & \text{15.920.000} & \text{12.640.000}\\
\text{Net operating income (loss)} & \text{\$ 3.750.000} & \text{\$ 2.310.000} & \text{\$ 2.080.000} & \text{\$ (640.000)}\\
\end{matrix}
$$
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 $1,200,000 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, 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 that the Clayton facility be closed. 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 clown the Clayton facility is ethical? Explain. 3. What influence should the depreciation on the facilities at Clayton have on prices charged by Clayton for its services? ACCOUNTINGConnick Company sells its product for $22 per unit. Its actual and budgeted sales follow.$
$$
\begin{matrix}
& \text{Units} & \text{Dollars}\\
\text{January (actual)}\ldots\ldots\ldots & \text{18,000} & \text{\$396,000}\\
\text{February (actual)}\ldots\ldots\ldots & \text{22,500} & \text{495,000}\\
\text{March (budgeted)}\ldots\ldots\ldots & \text{19,000} & \text{418,000}\\
\text{April (budgeted)}\ldots\ldots\ldots & \text{18,750} & \text{412,500}\\
\text{May (budgeted)}\ldots\ldots\ldots & \text{21,000} & \text{462,000}\\
\end{matrix}
$$
$All sales are on credit. Recent experience shows that 40% of credit sales is collected in the month of the sale, 35% in the month after the sale, 23% in the second month after the sale, and 2% proves to be uncollectible. The product’s purchase price is$12 per unit. Of purchases made in a month, 30% is paid in that month and the other 70% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 20% of the next month’s unit sales plus a safety stock of 100 units. The January 31 and February 28 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,920,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance for month-end is$50,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $50,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 12% interest rate. At February 28, the loan balance is$12,000, and the company’s cash balance is $50,000. 1. Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of March and April. 2. Prepare a schedule showing the computations of budgeted ending inventories (units) for January, February, March, and April. 3. Prepare the merchandise purchases budget for February, March, and April. Report calculations in units and then show the dollar amount of purchases for each month. 4. Prepare a schedule showing the computation of cash payments on product purchases for March and April. 5. Prepare a cash budget for March and April, including any loan activity and interest expense. Compute the loan balance at the end of each month. 6. Refer to your answer to part 5. The cash budget indicates whether the company must borrow additional funds at the end of March. Suggest some reasons that knowing the loan needs in advance would be helpful to management.
