Accrued pension benefits represent an obligation of a company for the past service of its employees. No current or future action can affect this obligation. The amortization of accrued pension benefits must be recognized, however, as a current expense in the company's financial statements. Many companies turn around and allocate these costs to divisions. One company allocated these costs in proportion to pension benefits accrued by its workers. A plant with an older work force received almost all of its division's accrued pension costs, adding $4 per hour to the plant's labor cost relative to the cost of several newer plants with much younger workers.
(a). How is this allocation of accrued pension benefits likely to affect future investment decisions? The competitiveness of products manufactured by the plant?
(b). Suppose that because of its high labor costs, the company decided to shut down the older plant and shift work to the newer ones. How will this decision affect the company's competitiveness?