Managerial Accounting Functional Based Analysis Homework Help
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PLANT SHUTDOWN OR CONTINUE OPERATIONS, QUALITATIVE CONSIDERATIONS, FUNCTIONAL BASED ANALYSIS
GianAuto Corporation manufactures automobiles, vans, and trucks. Among the various GianAuto plants around the United States is the Denver cover plant, where vinyl covers and upholstery fabric are sewn. These are used to cover interior seating and other surfaces of GianAuto products.
Pam Vosilo is the plant manager for the Denver cover plant—the first GianAuto plant in the region. As other area plants were opened, Pam, in recognition of her management ability, was given the responsibility to manage them. Pam functions as a regional manager, although the budget for her and her staff is charged to the Denver plant.
Pam has just received a report indicating that GianAuto could purchase the entire annual output of the Denver cover plant from outside suppliers for $30 million. Pam was astonished at the low outside price, because the budget for the Denver plant’s operating costs was set at $52 million. Pam believes that the Denver plant will have to close down operations in order to realize the $22 million in annual cost savings.
The budget (in thousands) for the Denver plant’s operating costs for the coming year follows
|Plant manager and staff||2,000|
|Total budgeted costs||$52,000|
Additional facts regarding the plant’s operations are as follows
Due to the Denver plant’s commitment to use high-quality fabrics in all of its products, the purchasing department was instructed to place blanket orders with major suppliers to ensure the receipt of sufficient materials for the coming year. If these orders are cancelled as a consequence of the plant closing, termination charges would amount to 15 percent of the cost of direct materials.
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Approximately 700 plant employees will lose their jobs if the plant is closed. This includes all 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, but many others would have difficulty. All employees would have difficulty matching the Denver plant’s base pay of $9.40 per hour, the highest in the area. A clause in the Denver plant’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 $1 million for the year.Some employees would probably elect early retirement because the company has an excellent pension plan. In fact, $3 million of next year’s pension expense would continue whether or not the plant is open. Pam and her staff would not be affected by the closing of the Denver plant. They would still be responsible for administering three other area plants.
Equipment depreciation for the plant is considered to be a variable cost and the units-of-production method is used to depreciate equipment; the Denver plant is the only GianAuto plant to use this depreciation method. However, it uses the customary straight-line method to depreciate its building.
1. Prepare a quantitative analysis to help in deciding whether or not to close the Denver plant. Explain how you would treat the nonrecurring relevant costs.
2. Consider the analysis in Requirement 1, and add to it the qualitative factors that you believe are important to the decision. What is your decision? Would you close the plant? Explain. (CMA adapted)
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