Additional facts regarding the plant's operations are as follows a. Due to Denver Cover's 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 390 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 Cover's base pay of $12.80 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 closing. The estimated cost to administer this service would be $0.72 million for the year C. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $0.78 million d. Vosilo and his staff would not be affected by the closing of Denver Cover. They would still be responsible for administering three e. If the Denver Cover Plant were closed, the company would realize about $1.68 million salvage value for the equipment and building of the annual pension expense would continue whether Denver Cover is open or not. other area plants If the plant remains open, there are no plans to make any significant investments 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. Management 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. c. Any nonrecurring costs that would arise due to the closing of the plant. 3. Looking at the data you have prepared in (2) above, a. Calculate the financial advantage (disadvantage) of closing the plant. b. Should the plant be closed? Req 2C Req 2A Req 2B Req 3A Req 3B QualSupport 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 the annual budgeted costs that are relevant to the decision regarding closing the plant. (Enter your answers in dollars not in millions.) Materials $ 8,400,000 Labor: $7,000,000 400,000 2,300,000 Direct labor Supervision Indirect plant 9,700,000 Differential pension cost $ 18,100,000 Total annual relevant costs Req 2A Req 2B> Req 2A Req 2B Req 2C Req 3B Req 3A Looking at the data you have prepared in (2), Calculate the financial advantage (disadvantage) of closing the plant. (Enter your answers in dollars not in millions. Any reductions or outflow should be indicated by a minus sign.) First year Other Years Cost of purchasing the covers outside Costs avoided by closing the plant Cost of closing the plant Salvage value of equipment and building Financial advantage (disadvantage) of closing the plant$ 0 Req 2C Req 3B > Req 2A Req 2B Req 2C Req 3A Req 3B Looking at the data you have prepared in (2), should the plant be closed? Yes K Req 3A Req 3B
