Automotive Interiors (AI) is a U.S. company that manufactures seats for automobiles, vans, trucks, and boats. The company has a number of plants, including the Woodstock Cover Plant1, which makes seat covers. The company has recently been experiencing financial difficulty and is in breach of certain financial covenants on its loan facilities. The company is currently engaged in an out of court loan workout process with its lenders. Operational restructuring is high on the agenda of lenders. The Chief Restructuring Officer (CRO) has been made aware of the following development at AIs Woodstock Cover Plant:

Bill Rice is the plant manager at the Woodstock Cover Plant but also serves as the regional production manager for the company. His budget as the regional manager is charged to the Woodstock plant. Rice has just heard that AI has received a bid from an outside vendor from Asia to supply the equivalent of the entire annual output of the Woodstock 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 $48.6 million. If this bid is accepted, the Woodstock operation will be closed down.

The budget for the Woodstock Cover Plant's operating costs for the coming year is presented below:

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 were cancelled as a consequence of the plant closing, termination charges would amount to 25% of the cost of direct materials.

b. Approximately 350 employees would lose their jobs if the plant were closed. This includes all of the direct laborers 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 of the production workers would have difficulty matching the plant's base pay of $12.50 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 $1.6 million.

c. Some employees would probably choose early retirement because AI has an excellent pension plan. In fact, $1.4 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 Woodstock plant. They would still be responsible for running three other area plants.

e. If the plant were closed, the company would realize about $4 million salvage value for the equipment in the plant. If the plant remained open, there would be 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. Using relevant costing concepts, help the CRO in preparing a financial analysis to decide whether or not to close the Woodstock Cover Plant. Should the CRO recommend that the plant be closed as a part of the restructuring exercise?

2. The CRO is aware of recent political developments and fears that the U.S. federal government might slap punitive tariffs on the imported seat covers. How does this factor change the CROs analysis, if at all?

3. Now assume that the company had previously issued bonds which had included an asset sale covenant (i.e.., a covenant that restricts sales of operating PP&E). What can the CRO do to complete the closure of the plant and realize the salvage value of the equipment?

4. Identify any other operational factors not specifically mentioned in the problem that the CRO should consider before making a decision.

*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