BUS1104 Managerial Accounting
\n1st Term 2022 -2023
\nCase Studies
\nManagement accounting————————————————————————————————————————
\nPlant Closing Decision
\nQualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has
\na number of plants around the world, including the Denver Cover Plant, which makes seat covers.
\nTed Vosilo is the plant manager of the Denver Cover Plant but also serves as the regional production manager for the company.
\nHis budget as the regional manager is charged to the Denver Cover Plant.
\nVosilo has just heard that QualSupport has received a bid from an outside vendor to supply the equivalent of the entire annual
\noutput of the Denver Cover Plant for $20.64 million. Vosilo was astonished at the low outside bid because the budget for the
\nDenver Cover Plant\u2019s operating costs for the upcoming year was set at $23.94 million. If this bid is accepted, the Denver Cover
\nPlant will be closed down.
\nThe budget for Denver Cover\u2019s operating costs for the coming year is presented below.
\nDenver Cover Plant
\nAnnual Budget for Operating Costs
\nMaterials $ 7,000,000
\nLabor:
\nDirect $7,200,000
\nSupervision 350,000
\nIndirect plant 2,200,000 9,750,000
\nOverhead:
\nDepreciation\u2014equipment 1,800,000
\nDepreciation\u2014building 1,500,000
\nPension expense 1,300,000
\nPlant manager and staff 690,000
\nCorporate expenses* 1,900,000 7,190,000
\nTotal budgeted costs $23,940,000
\n*Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.
\nAdditional facts regarding the plant\u2019s operations are as follows:
\na. Due to Denver Cover\u2019s commitment to use high-quality fabrics in all of its products, the Purchasing Department was
\ninstructed to place blanket purchase orders with major suppliers to ensure the receipt of sufficient materials for the
\ncoming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to
\n25% of the cost of direct materials.
\nb. Approximately 380 plant employees will lose their jobs if the plant is closed. This includes all of the direct laborers and
\nsupervisors as well as the plumbers, electricians, and other skilled workers classified as indirect plant workers. Some
\nwould be able to find new jobs while many others would have difficulty. All employees would have difficulty matching
\nDenver Cover\u2019s base pay of $13.20 per hour, which is the highest in the area. A clause in Denver Cover\u2019s contract with
\nthe union may help some employees; the company must provide employment assistance to its former employees for 12
\nmonths after a plant closing. The estimated cost to administer this service would be $0.8 million for the year.
\nc. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact,
\n$0.76 million of the annual pension expense would continue whether Denver Cover is open or not.
\nd. Vosilo and his staff would not be affected by the closing of Denver Cover. They would still be responsible for
\nadministering three other area plants.
\ne. If the Denver Cover Plant were closed, the company would realize about $1.75 million salvage value for the equipment
\nand building. If the plant remains open, there are no plans to make any significant investments in new equipment or
\nbuildings. The old equipment is adequate and should last indefinitely.
\nRequired:
\n1. Without considering costs, identify the advantages to QualSupport Corporation of continuing to obtain covers from its
\nown Denver Cover Plant.
\n2. QualSupport Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the
\nDenver Cover Plant. Management has asked you to identify:
\na. The annual budgeted costs that are relevant to the decision regarding closing the plant. (show the dollar
\namounts)
\nb. The annual budgeted costs that are irrelevant to the decision regarding closing the plant and explain why they
\nare irrelevant. (show the dollar amounts)
\nc. Any nonrecurring costs that would arise due to the closing of the plant, and explain how they would affect the
\ndecision. (show the dollar amounts)
\n3. Looking at the data you have prepared in (2) above,
\na. Calculate the financial advantage (disadvantage) of closing the plant.
\nb. Should the plant be closed?
\n4. Identify any revenues or costs not specifically mentioned in the problem that QualSupport should consider before
\nmaking a decision.<\/p>\n","protected":false},"excerpt":{"rendered":"
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