Autocorpo inc. Autocorpo inc. builds cars, minivans and trucks. The company has several plants around the world, including Qubec inc. and Gasp inc. The Qubec inc. division sews covers, made mainly from vinyl and fabric, used to protect seats and other surfaces of Autocorpo products. For many years, Gasp inc. has specialized in producing rear-view mirrors. This division buys glass plates that it transforms to produce mirrors that are then added to rear-view mirrors. The rear-view mirrors are sold to external business customers (beyond Autocorpo). Qubec inc., run by Mo Tremblay, was the first Autocorpo plant in the region. As other plants opened, Mr. Tremblay, renowned for his managerial skills, was assigned to run them. His current position is regional director, although his budget and that of his staff are allocated to the Qubec Inc. plant. Mr. Tremblay has just received a report stating that Autocorpo could acquire all of Qubec Inc.'s annual production from an outside supplier for $35 million. He is astonished at the low price offered by the competition given that the operating expense budget of his plant was set at $52 million for the next fiscal year. Mr. Tremblay thinks that Autocorpo should close the Qubec inc. plant so that it could save $17 million in costs annually. The operating expense budget of Qubec inc. for the next fiscal year is presented in Appendix 1. Here is some additional information about the plant's operations. a) Qubec inc. uses superior quality fabric exclusively for all of its products. The purchasing section was told to give the main suppliers standing orders to ensure a sufficient supply of raw materials for the coming year. If the plant were to close, it would have to pay cancellation costs equal to 20% of the cost of the raw materials. b) About 800 employees would lose their jobs if the plant closed. This number includes all of the direct employees and supervisors along with plumbers, electricians and other skilled workers who make up the indirect workers at the plant. Many of them could find new jobs, but many others would have trouble. None could easily find a base hourly pay comparable to that given by Qubec inc., which is the highest in the 2 region, at $20. However, a clause in the contract between the company and the union may be useful for some employees. The company is obliged to help its former workers with their job search for 12 months after the plant closes. The cost of administering the service is estimated at $1.5 million for one year. c) Some employees would undoubtedly opt for early retirement. Autocorpo offers an excellent retirement plan. It would have to continue to pay $3 million in annual retirement expenses if the plant closes. d) Mr. Tremblay and his staff would not be affected by the closure of Qubec inc. because they would still be in charge of running the three other plants in the region. e) Qubec inc. views amortization of equipment as a variable cost, which is calculated on a unit-of-production basis. It is the only Autocorpo plant that uses this method. However, amortization of the building is calculated according to the usual straight-line method. The rear-view mirror market is currently very weak because of the slumping automobile industry. This led Gasp inc. management to reduce the price of rear-view mirrors from $40 to $30 (see Appendix 2 for the costs and revenues linked to production of rear-view mirrors). At first, all of the glass plates were used to produce mirrors for rear-view mirrors. However, in recent years, the general mirror market developed. Other businesses bought mirrors to produce all types of mirrors intended for various markets. Since this market emerged, the division has been rethinking its decision to produce rear-view mirrors. Because the mirror market is still strong, the dilemma of selling mirrors or transforming them resurfaced. Appendix 3 presents the costs and revenues linked to production of mirrors (one mirror can be used to make 4 rear-view mirrors). The sales director thinks the plant should stop producing rear-view mirrors. One good reason is that the sale of each rear-view mirror incurs a loss of $2.50 while one mirror could generate a profit of $4 (proportionally). However, the director of the production department is worried about having to shut down much of the plant. He argues that the Gasp inc. division specializes in rear-view mirrors and not in mirrors in general. As a result, it should concentrate its efforts on what it does best. He even suggested that lowering the price of 3 rear-view mirrors may make the division more competitive. Because of the nature of the production process, almost all of the indirect production costs are fixed. They would not vary even if the rear-view mirror line were discontinued. The indirect costs of all the products correspond to 150% of the cost of direct labour. Assignment: The Autocorpo management has asked you, an external consultant, to help them make the best decisions given the challenges they face. Your report should cover the following points: - Closure of the Qubec inc. plant -Transformation of mirrors into rear-view mirrors - Setting of a minimum selling price for a rear-view mirror 4 Appendix 1 Qubec inc. plant Annual operating expense budget Raw materials $14,000,000 Labour: Direct $13,100,000 Supervisors 900,000 Indirect 4,000,000 18,000,000 Indirect production costs: Amortization equipment 3,200,000 Amortization building 7,000,000 Retirement expenses 5,000,000 Plant manager and personnel 800,000 Allocation of expenses from head office 4,000,000 20,000,000 Total projected costs $52,000,000 Appendix 2 Gasp inc. plant Costs and revenue linked to manufacturing rear-view mirrors Selling price $30.00 Production costs: Raw materials: Mirrors $16.00 Other 2.00 Total, raw materials 18.00 Direct labour 5.80 Indirect production costs 8.70 32.50 Gross profit $(2.50) Appendix 2 Gasp inc. plant Costs and revenue linked to manufacturing mirrors Selling price $80.00 Production costs Raw materials 28.00 Direct labour 14.40 Indirect production costs 21.60 64.00 Gross profit $16.00