Several years ago, Carlson Manufacturing
moved to a larger production facility to accommodate its growing business. Instead of selling their old facility, they rented it to another firm and have been receiving rental income from the tenant. The tenant’s lease is getting ready to expire but instead of renewing the lease, Carlson has decided to take the building back and use it to manufacture a new product. Carlson will continue to depreciate the building on a straight-line basis as they have done in prior years, so there will be no change in depreciation expense. The old building is large enough to house the majority of operations, but they will need to rent a small storage building for raw materials. They have also decided that instead of purchasing the machinery necessary for production, they will rent the equipment on a monthly basis. Their existing workforce is unable to accommodate the production of the new product so Carlson will hire new workers and a supervisor to oversee production. The existing marketing department has the ability to handle the marketing of the new product, provided they receive additional funds to cover the cost. Since this is a new venture, their bank is hesitant to fund the start-up of operations so Carlson has decided to liquidate some short-term investments to cover start-up costs and provide them with working capital. Although they will lose the return on these short-term investments, they are comfortable that in the long run the investment in this new product will be worth it.
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