6.4 ETHICS CASE: CONTINUING OPERATIONS DECISIONS

Adapted from Textbook Problem 17-26

KarlAuto Corporation manufactures automobiles, vans, and trucks. Among the various KarlAuto plants around the United States is the Bloomington plant, where vinyl covers and upholstery fabric are sewn. These are used to cover interior seating and other surfaces of KarlAuto products.

Pam Teegin is the plant manager for the Bloomington cover plantthe first KarlAuto plant in the region. As other area plants were opened, Teegin, in recognition of her management ability, was given the responsibility to manage them. Teegin functions as a regional manager, although the budget for her and her staff is charged to the Bloomington plant.

Teegin has just received a report indicating that KarlAuto could purchase the entire annual output of the Bloomington cover plant from outside suppliers for $32 million. Teegin was astonished at the low outside price, because the budget for the Bloomington plant's operating costs was set at $56.45 million. Teegin believes that the Bloomington plant will have to close down operations in order to realize the $24.45 million in annual cost savings.

The budget (in thousands) for the Bloomington plant's operating costs for the coming year follows:

Additional facts regarding the plant's operations are as follows:

Materials Labor: Direct Supervision Indirect plant Overhead: Depreciationequipment Depreciationbuilding Pension expense Plant manager and staff Corporate allocation Total budgeted costs $13,800 3.750 4,300 5 5,000 3.000 5.600 3,000 6,000 $11000 2|.850 22,600 5 56.45 0