Marvin Braun had just been appointed vice president of the Great Basin Region of the Financial Services Corporation (FSC). The company provides check processing services for small banks. The banks send checks presented for deposit or payment to FSC, which then records the data on each check in a computerized database. FSC sends the data electronically to the nearest Federal Reserve Bank check-clearing center where the appropriate transfers of funds are made between banks. The Great Basin Region consists of three check processing centers in Eastern Idaho—Pocatello, Idaho Falls, and Ashton. Prior to his promotion to vice president, Mr. Braun had been manager of a check processing center in Indiana.

Immediately upon assuming his new position, Mr. Braun requested a complete financial report for the just-ended fiscal year from the region's controller, Lance Whiting. Mr. Braun specified that the financial report should follow the standardized format required by corporate headquarters for all regional performance reports. That report appears below:

*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 revenues.

‡Corporate administrative expenses represent a standard 8% charge against revenues.

Upon seeing this report, Mr. Braun summoned Lance Whiting for an explanation.

  • Braun: What's the story on Ashton? It didn't have a loss the previous year, did it?
  • Whiting: No, the Ashton facility has had a nice profit every year since it was opened six years ago, but Ashton lost a big contract this year.
  • Braun: Why?
  • Whiting: One of our national competitors entered the local market and bid very aggressively on the contract. We couldn't afford to meet the bid. Ashton's costs—particularly their facility expenses—are just too high. When Ashton lost the contract, we had to lay off a lot of employees, but we could not reduce the fixed costs of the Ashton facility.
  • Braun: Why is Ashton's facility expense so high? It's a smaller facility than either Pocatello or Idaho Falls and yet its facility expense is higher.
  • Whiting: The problem is that we are able to rent suitable facilities very cheaply at Pocatello and Idaho Falls. No such facilities were available at Ashton, so 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.
  • Braun: Well, we can't do that anymore. The Ashton facility will obviously have to be shut down. Its business can be shifted to the other two check processing centers in the region.
  • Whiting: I would advise against that. The $900,000 in depreciation charges at the Ashton facility are misleading. That facility should last indefinitely with proper maintenance. And it has no resale value; there is no other commercial activity around Ashton.
  • Braun: What about the other costs at Ashton?
  • Whiting: If we shifted Ashton'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 $60,000 or so in local administrative expenses, but we would not save any regional administrative expense. And corporate headquarters would still charge us 8% of our revenues as corporate administrative expenses. In addition, we would have to rent more space in Pocatello and Idaho Falls to handle the work transferred from Ashton; that would probably cost us at least $400,000 a year. And don't forget that it will cost us something to move the equipment from Ashton to Pocatello and Idaho Falls. And the move will disrupt service to customers.
  • Braun: I understand all of that, but a money-losing processing center on my performance report is completely unacceptable.
  • Whiting: And if you do shut down Ashton, you are going to throw some loyal employees out of work.
  • Braun: That's unfortunate, but we have to face hard business realities.
  • Whiting: And you would have to write off the investment in the facilities at Ashton.
  • Braun: I can explain a write-off to corporate headquarters; hiring an inexperienced contractor to build the Ashton 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. Ashton has to go. At the next corporate board meeting, I am going to recommend that the Ashton facility be closed.
  • 1. From the standpoint of the company as a whole, should the Ashton processing center be shut down and its work redistributed to the other processing centers in the region? Explain.
  • 2. Do you think Marvin Braun's decision to shut down the Ashton facility is ethical? Explain.
  • 3. What influence should the depreciation on the facilities at Ashton have on prices charged by Ashton for its services?