Problem 3 Shut Down or Continue Operations Haley Romeros had just been appolnted vice prealdent of tne Rocky Mountain Region of the Eank Services Corporation (BSC). The company provides oheck processing services for small banks. The banks sand cheoks presented for depoalt or payment to ESC, which recorda the data on each check in a computertzed database. BSC then senda the data electronicalily to the nearest Federal Reserve Bank check-clearing center where the appropriate tranafers of funds are made between banks. The Rocky Mountain Reglon nas tnree cheok processing centers, wnich are ocated iIn Bngs, Montens:Great Falls, Montana; and Clayton, ldaho. Prior to her promotion to vice president, Ms. Romeros had been the manager of a check processing center in New Jersey. Immediately after aasuming her new poaltion, MB. Romeros requeated a oomplete ftnancial report for the just-ended facal year from the region's controller, John Littiebear. Ms. Romeros specified that the financial report should follow the atandardized format required by corporate headquarters for ail regionai performance reports. That report follaws Great Fals Saks 500 00 50000 1,Do0 co0 1200 000 300 oo 20 000 1 500 000 600 000 2310 000 Upon seeing this report, Ms. Romeros summoned John Lttiebear for an expianation, Romeros: Whats the atory on Clayton? It didn't have a loss the previous year did it? Lttiebear No, the Clayton facility has nad a nloe profi t every year since It was opened sbx years 399, out Clayton loat a big contract thia year. Romeros: Why? Lttiebear. One of our national compettors entered the local market and bid very aggressvely on the contract We couidn't afford to meet the bid. Clayton's coats-partliouiarty their facility expenses-are just too high. When Clayton lost the contract, we had to lay off a ot of employees, but we couid not reduce the fl xed coats of the Clayton facility Romeros: Why ls Cayton's faclility expense so nigh2 It's a smalier faallity than eltner Btings or Great Falils and yet ita facility expense ls higner. Lriebear. The problem is that we are sbie to rent suitable ctes very cheaply at aiings and Great Falls. No such faclities were avalable at Clayton; we had them bullt. Unfortunately there were big coat overruns. The contractor we hired was Inexperlenced at this kind of work and In fact went bankrupt before the project was oompleted. After hiring another contractor to fi nish the work, we were way over budget. The large depreclation charges on the faallity dian't matter at fi rat because we didn't nave much competition at the time and could charge premium prices Romeros: ell we can't do that anymore. The Clayton faclility will obviously have to be shut down Ita business can be shifted to the other two check procesaing centers in the region. Littlebear: I would advise against that. The $1,200,000 In depreclation at the Clayton faollity la misleading. That facility should last indefinitely with proper mitenance. And resale value; there is no other commerclai actvity around Clayton. has no Romeros: wnat about the other coste at Clayton? Lttiebear if we shifted Clayton's business over to the other two prooessing centers in the region, we woulan t aave enything on direct labor or varlable overnesd costs. We might save $B0,000 or so In local administrative expense, but we would not save any reglonal administrative expense and corporate headquarters would stil onarge us 9.5% of our sales aa corporate administrative expense. In addition, we would have to rent more space in Blings and Great Falls in order to nandie the work transferred from Clayton; that would probabty cost us at least $e00,000 a year And don't forget that it will cost us something to move the equipment from Clsyton to Eillings and Great Falis. And the move wil disrupt service to customers Romeros: understand all of that, but a money-losing processing center on my performance report is completely unaocepiabie. Littlebear. And If you ahut down Cilayton, you are going to throw some loyal employees out of Romeros: Thats unfortunate, but we have to face hard busineas reallties. Lttiebear: And you would have to write off the investment in the faclilties at Clayton. Romeros: can explaln a write-off to corporate headquarters: hlring an inexperienoed contractor buld the Clayton facility was my predecessor's mistake. But they'll nave my head at nesdquarters If I show operating losees every year at one of my prooessing centers Clayton has to go. At the next corporate board meeting. I am going to recommend that the Clayton faclity be olosed. 1. From the standpoint of the company a a whole, should the Clayton processing center be shut down and its work redistibuted to other proceasing centers In the region? 2. Do you think Haley Romeroa's decision to shut down the Clayton faclility is etnicai? 3. What infl uence should the depreciation on the facllibes at Clayton nave on prioen charged by Clayton for its services