Question

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a number of plants around the world, including the Denver Cover Plant which makes seat covers Ted Vosilo is the plant manager of the Denver Cover Plant but also serves as the regional production manager for the company. His budget as the regional manager is charged to the Denver Cover Plant Vosilo has just heard that QualSupport has received a bid from an outside vendor to supply the equivalent of the entire annual output of the Denver Cover Plant for $19.12 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant's operating costs for the upcoming year was set at $22.42 million. IT this bid is accepted, the Denver Cover Plant will be closed down. The budget for Denver Cover's operating costs for the coming year is presented below. Denver Cover Plant Annual Budget for Operating Costs Materials Labor Direct $ 7,600,000 $6,500,000 460,000 Indirect plant Overhead 8,460,000 1.400,000 1,500,000 1,700,000 Pension expense Plant manager and staff Corporate expenses Total budgeted costs 660,000 1100,000 6360,000 S 22,420,000 ·Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs. Additional facts regarding the plant's operations are as follows: a Due to Denver Cover's commitment to use high-quality fabrics in all of its products, the Purchasing Department was instructed to place blanket purchase orders with major suppliers to ensure the b. Approximately 360 plant employees will lose their jobs if the plant is closed. This includes all of the direct laborers and supervisors as well as the plumbers, electricians, and other skilled workers receipt or sufficient materials for the coming year. If these orders are canceled as a consequence of the plant cosing, termination charges would amount to 25% of the cost or direct materials classified as indirect plant workers. Some would be able to find new jobs while many others would have ditriculty. All employees would have difficulty matching Denver Cover's base pay of $12.70 per hour, which is the highest in the area. A clause in Denver Cover's contract with the union may help some employees, the company must provide employment assistance to its former employees for 12 months after a plant closing. The estimated cost to administer this service would be $0.83 million for the year. C. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, S0.68 million of the annual pension expense would continue whether Denver Cover is open or not.

Answer 1

a.Relevant costs(Costs that can be avoided if the plant is closed)
Materials		7600000
Direct labor	6500000
Supervision	460000
Indirect Plant	1500000	8460000
Diffrerence in pension(1700000-680000)		1020000
Total relevant costs		17080000
b. Costs not relevant(anyway,will be incurred irrespective of the decision --to close or continue
Depn. Eqpt.	1400000
Depn. Bldg.	1500000
Pension expense	680000
Plant mgr.& staff	660000
Corporate exp.	1100000
Total	5340000
C. Non-recurring costs (one-time)that would arise in case of closing
Supplier termination charges(7600000*25%)	1900000
Former employee temporary assistance	830000
Total non-recurring costs	2730000
d. Net advantage (disadvantage) of closing the plant.
Relevant Operating costs(Costs that can be avoided if the plant is closed)	17080000
Non-recurring costs that would arise in case of closing	-2730000
Outside purchase price of covers	-19120000
Salvage value of equipment & building	1900000
Net advantage(disadvantage)of closing	-2870000
NO. The plant should not be closed as the costs outweigh the savings