Study

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Qual Support Corporation

Plant Closing Case Study

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 productionmanager 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

v

endor to supply the

equivalent of the entire annual output of the Denver Cover

Plant for $35 million. Vosilo was astonished at

the low outside bid because the

budget for the Denver Cover P

lants operating costs for the upcoming year

was set at $52 million. If this bid is accepted, the Denver Cover Plant will be

closed down.

The budget for Denver Covers operating costs for the coming year is presented

below.

Denver Cover Plant

Annual

Budget for Operating Costs

Materials

$ 14,000,000

Labor:

Direct

$ 13,100,000

Supervision

900,000

Indirect plant

4,000,000

18,000,000

Overhead:

Depreciation

equipment

3,200,000

Depreciation

building

7,000,000

Pension expense

5,000,000

Plant manager and staff

800,000

Corporate expenses*

4,000,000

20,000,000

Total budgeted costs

$

52,000,000

*Fixed

corporate expenses allocated to plants and other operating units based on

total budgeted wage

and salary costs.

a.

Due to Denver Covers 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

20% of the cost of direct materials.

b. Approximately 400 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

Covers

base pay of $18.80 per

hour, which is the highest in the area. A

clause in Denver Covers 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 $1.5 million for the year.

c. Some employees would probably choose early retirement because

Qua

lSupport has an excellent pension plan. In fact, $3 million of the

annual pension expense would continue whether Denver Cover is open or

not.

d. Vosilo and his staff would not be affected by the closing of Denver

Cover. They would still ber

esponsible for

administering three other area

plants.

e. If the Denver Cover Plant were closed, the company would realize

about $3.2 million salvage value for

the equipment and building. If the

plant remains open, there are no plans to make any significant

investment

s in new equipment or buildings. The old equipment is

adequate and should last indefinitely.

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. Manage

ment 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.

Depreciation

equipment

$

Total annual continuing

costs

$

c. Any nonrecurring costs that would arise due to the closing of the plant.

Termination charges on canceled material orders

$

Total nonrecurring costs

$

Materials

$

Labor:

Direct

$

Supervision

Indirect plant

Differential pension cost

Total annual relevant costs

$

3. Looking at the

data you have prepared in (2) above,

a. Calculate the Net advantage (disadvantage) of closing the plant.

First

year

Other

Years

$

Salvage

value

of

equipment

and

building

3,200,000

Net

advantage

(disadvantage)

of

closing

the

plant

b.

Should

the

plant

be

closed?

Yes___________

No ___________