1. The original cost of the facilities at Clayton is a sunk cost and should be ignored in any decision. The decision being considered here is whether to continue operations at Clayton. The only relevant costs are the future facility costs that would be affected by this decision. If the facility were shut down, the Clayton facility has no resale value. In addition, if the Clayton facility were sold, the company would have to rent additional space at the remaining processing centers. On the other hand, if the facility were to remain in operation, the building should last indefinitely, so the company does not have to be concerned about eventually replacing it. Essentially, there is no real cost at this point of using the Clayton facility despite what the financial performance report indicates. Indeed, it might be a better idea to consider shutting down the other facilities since the rent on those facilities might be avoided.

The costs that are relevant in the decision to shut down the Clayton facility are: Increase in rent at Billings and Great Falls................... $600,000 Decrease in local administrative expenses ................... (90,000) Net increase in costs ................................................. $510,000
In addition, there would be costs of moving the equipment from Clayton and there might be some loss of sales due to disruption of services. In sum, closing down the Clayton facility would almost certainly lead to a decline in BSC’s profits.
Even though closing down the Clayton facility would result in a decline in overall company profits, it would result in an improved performance report for the Rocky Mountain Region (ignoring the costs of moving equipment and potential loss of revenues from disruption of service to
customers).