Question

Check my work 1 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. 6 points 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 $19.39 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 $22.69 million. If this bid is accepted, the Denver Cover Plant will be closed down. eBook Print References The budget for Denver Cover's operating costs for the coming year is presented below. Denver Cover Plant Annual Budget for Operating Costs $ 7,400,000 Materials Labor: Direct $5,900,000 320,000 2,300,000 Supervision Indirect plant 8,520,000 Overhead: Depreciation-equipment Depreciation-building Pension expense Plant manager and staff Corporate expenses 1,800,000 1,800,000 1,400,000 670,000 1,100,000 6,770,000 $22,690,000 Total budgeted costs Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs. Check my work 1 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 receipt of sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 30% of the cost of direct materials. b. Approximately 330 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 classified as indirect plant workers. Some would be able to find new jobs while many others would have difficulty. All employees would have difficulty matching Denver Cover's base pay of $13.10 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 $0.77 million for the year. c. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact $0.67 million of the annual pension expense would continue whether Denver Cover is open or not. 6 points eBook Print References d. Vosilo and his staff would not be affected by the closing of Denver Cover. They would still be responsible for administering three other area plants. e. If the Denver Cover Plant were closed, the company would realize about $2.22 million salvage value for the equipment and building. If the plant remains open, there are no plans to make any significant investments in new equipment or buildings. The old equipment is adequate and should last indefinitely. 10 Check my work 1 Required: 2. QualSupport Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Denver Cover Plant. Management has asked you to identify: a. The annual budgeted costs that are relevant to the decision regarding closing the plant. b. The annual budgeted costs that are not relevant to the decision regarding closing the plant. c. Any nonrecurring costs that would arise due to the closing of the plant. 6 points 3. Looking at the data you have prepared in (2) above, a. Calculate the financial advantage (disadvantage) of closing the plant. b. Should the plant be closed? eBook Print References Complete this question by entering your answers in the tabs below. Req 2A Req 3A Req 2B Req 2C Req 3B QualSupport Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Denver Cover Plant. Management has asked you to identify the annual budgeted costs that are relevant to the decision regarding closing the plant. (Enter your answers in dollars not in millions.) Labor

Answer 1

Answer 2

a) The following annual budgeted costs are relevant to the decision regarding closing the plant

Materials		$7,400,000
Labor:
Direct	$5,900,000
Supervision	320,000
Indirect Plant	2,300,000	$8,520,000
Differential Pension Cost ($1,400,000-$670,000)		730,000
Total annual relevant costs		$16,650,000

b) The following annual budgeted costs are not relevant to the decision regarding closing the plant

Depreciation -equipment	$1,800,000
Depreciation -building	1,800,000
Continuing pension cost	670,000
Plant manager and staff	670,000
Corporate expenses	$1,100,000
Total annual continuing(not relevant) costs	$6,040,000

c) the following non-recurring cost would arise due to the closing of the plant

Termination Charges on cancelled material orders($7,400,000*30%)	2,220,000
Employment assistance	770,000
Total recurring costs	2,990,000

These cost will be incurred in the year plant will be closed but not in any other year. These two costs are relevant to the decision because they will be incurred only if the plant is closed.

Answer 3

a) Calculation of financial advantage(disadvantage) of closing the plant

	First Year	Other Years
Cost of purchasing the covers outside	(19,390,000)	(19,390,000)
Costs avoided by closing the plant (Part 2(a) above)	16,650,000	16,650,000
Cost of closing the plant (First Year only)	(2,990,000)
Salvage value of equipment and building	2,220,000
Net advantage (disadvantage) of closing the plant	($3,510,000)	(2,740,000)

b) No, the plant should not be closed as there is financial disadvantage in closing the plant.