GianAuto Corporation manufactures cars, vans and trucks. Among the various GianAuto plants around the United States is the Denver Cover Plant. Coverings made primarily of vinyl and upholstery fabric are sewn at the Denver Cover Plant and used to cover interior seating and other surfaces of GianAuto products. Ted Vosilo is the plant manager for Denver Cover. The Denver Cover Plant was the first GianAuto plant in the region. As other area plants were opened, Vosilo, in recognition of his management ability, was given responsibility for managing them. Vosilo functions as a regional manager, although the budget both for him and also for his staff is charged to the Denver Cover Plant. Vosilo has just received a report indicating that GianAuto could purchase the entire annual output of Denver Cover from outside suppliers for $35 million. Vosilo was astonished at the low outside price because the budget for Denver Cover's operating costs for the coming year was set at $52 million. Vosilo believes that GianAuto will have to close down operations at Denver Cover in order to realize the $22 million in annual cost savings. The budget for Denver Cover's operating costs for the coming year is presented below. Additional facts regarding the plant's operations are as follows:
1. Due to Denver Cover's commitment to using high-quality fabrics in all 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 cancelled as a consequence of the plant closing, termination charges would amount to 20% of the cost of direct materials.
2. Approximately 800 plant employees will lose their jobs if the plant is closed. This includes all the direct labourers 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 Cover's base pay of $9.40 per hour, which is the highest in the area. A clause in Denver Cover'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 closes. The estimated cost to administer this service would be $1.5 million for the year.
3. Some employees would probably choose early retirement because GianAuto has an excellent pension plan.
In fact, $3 million of the annual pension expense would continue whether Denver Cover is open or not.
4. Vosilo and his staff would not be affected by the closing of Denver Cover. They would still be responsible for administering three other area plants.
5. Denver Cover considers equipment depreciation to be a variable cost and uses the units-of-production method to depreciate its equipment; Denver Cover is the only GianAuto plant to use this depreciation method. However, Denver Cover uses the customary straight-line method to depreciate its building.

Required

1. Without regard to costs, identify the advantages to GianAuto Corporation of continuing to obtain covers from its own Denver Cover Plant.
2. GianAuto Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Denver Cover Plant. Management has asked you to identify:
(a) The annual budgeted costs that are relevant to the decision regarding closing the plant (show the monetary amounts).
(b) The annual budgeted costs that are not relevant to the decision regarding closing the plant, and explain why they are not relevant (again, show the monetary amounts).
(c) Any non-recurring costs that would arise due to the closing of the plant, and explain how they would affect the decision (again, show any monetary amounts).
3. Looking at the data you have prepared in Requirement 2 above, should the plant be closed? Show computations and explain your answer.
4. Identify any revenues or costs not specifically mentioned in the problem that GianAuto should consider before making a decision.

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Materials Labour: Direct Supervision Indirect plant Overhead: Depreciation equipment Depreciation - building Pension expense Plant manager and staff Corporate allocation Total budgeted costs Denver Cover plant Annual budget for operating costs $13,100,000 900,000 4,000,000 3,200,000 7,000,000 5,000,000 800,000 4,000,000 $14,000,000 18,000,000 20,000,000 $52,000,000