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 $23.51 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 $26.81 million. If 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 | $ | 9,000,000 | |||
Labor: | |||||
Direct | $ | 7,400,000 | |||
Supervision | 370,000 | ||||
Indirect plant | 2,200,000 | 9,970,000 | |||
Overhead: | |||||
Depreciation—equipment | 1,900,000 | ||||
Depreciation—building | 2,000,000 | ||||
Pension expense | 1,600,000 | ||||
Plant manager and staff | 540,000 | ||||
Corporate expenses* | 1,800,000 | 7,840,000 | |||
Total budgeted costs | $ | 26,810,000 | |||
*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:
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?
First Year | Other Years | |
Cost of purchasing the covers outside | ||
Cost avoided by closing the plant | ||
Cost of closing the plant | ||
Salvage value of equipment and building | ||
Financial advantage(disadvantage) of closing the plant |
Answer 3
a) Calculation of financial advantage(disadvantage) of closing the plant
First Year | Other Years | |
Cost of purchasing the covers outside | (23,510,000) | (23,510,000) |
Costs avoided by closing the plant (Part 2(a) above) | 19,860,000 | 19,860,000 |
Cost of closing the plant (First Year only) | (3,090,000) | |
Salvage value of equipment and building | 2,250,000 | |
Net advantage (disadvantage) of closing the plant | ($4,490,000) | (3,650,000) |
b) No, the plant should not be closed as there is financial disadvantage in closing the plant.
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