Allision Inc. $($AI$)$ manufactures seats for automobiles, vans, trucks, and boats. The company has a number

of plants, including the Mothercraft Cover Plant, which makes seat covers.

Bill Rice is the plant manager at the Mothercraft Cover Plant but also serves as the regional production

manager for the company. His budget as the regional manager is charged to the Mothercraft plant.

Rice has just heard that AI has received a bid from an outside vendor to supply the equivalent of the entire

annual output of the Mothercraft Cover Plant for $$42$ million. Rice was astonished at the low outside bid

because the budget for the plant's operating costs for the coming year was set at $$48\mathrm{.}6$ million. If this bid

is accepted, the Mothercraft operation will be closed down.

The budget for the Mothercraft Cover Plant's operating costs for the coming year is presented below.

Materials $$16,000,000$

Labor:

Direct $$13,400,000$

Supervision $800,000$

Indirect plant $3,800,00018,000,000$

Overhead:

Depreciation$$equipment $2,600,000$

Depreciation$$building $4,200,000$

Pension expense $3,200,000$

Plant manager and staff$*1,200,000$

Corporate expenses$3,400,00014,600,000$

Total budgeted costs $$48,600,000$

$*$Expense for Rice and his regional staff.

$$Fixed corporate expenses allocated to plants and other operating units based on

total budgeted wage and salary costs.

The following are additional facts regarding the plant's operations:

a$.$ Due to the plant'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 cancelled as a consequence

of the plant closing, termination charges would amount to $25\%$ of the cost of direct materials.

b$.$ Approximately $350$ employees will lose their jobs if the plant is closed. This includes all of the direct

labourers and supervisors, management and staff, and the plumbers, electricians, and other skilled

workers classified as indirect plant workers. Some of these workers would have difficulty finding

new jobs. Nearly all the production workers would have difficulty matching the plant's base pay of

$$12\mathrm{.}50$ per hour, which is the highest in the area. A clause in the plant's contract with the union

may help some employees; the company must provide employment assistance and job training to

its former employees for $12$ months after a plant closing. The estimated cost to administer this

service would be $$1\mathrm{.}6$ million.

c$.$ Some employees would probably choose early retirement because AI has an excellent pension

plan. In fact, $$1\mathrm{.}4$ million of the annual pension expenditures would continue whether the plant is

open or not.

d$.$ Rice and his regional staff would not be affected by the closing of the Mothercraft plant. They would

still be responsible for running three other area plants.

e$.$ If the plant was closed, the company would realize about $$4$ million salvage value for the equipment

in the plant. If the plant remains open, there are no plans to make any significant investments in

new equipment or buildings. The old equipment is adequate for the job and should last indefinitely.

Required:

$1.$ Without regard to costs, identify the advantages to AI of continuing to obtain covers from its

own Mothercraft Cover Plant.

$2.$ AI plans to prepare a financial analysis that will be used in deciding whether or not to close

the Mothercraft 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 dollar 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 dollar 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 dollar amounts$).$

$3.$ Looking at the data you prepared in $(2)$ 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 AI should

consider before making a decision.