Background on the case:

CASE

The Vice Company manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a number of plants around the world, including the Denver Cover Plant, which makes seat covers. Ted Vosilo is the plant manager of the Denver Cover Plant, but also serves as the regional production manager for the company. His budget as the regional manager is charged to the Denver Cover Plant. Vosilo has just heard that The Vice Company has received a bid from an outside vendor to supply the equivalent of the entire annual output of the Denver Cover for $35 million. Vosilo was astonished at the low outside bid because the budget (see worksheet) for the Denver Cover Plants operating costs for the upcoming year was set at $52 million. If this bid is accepted, the Denver Cover Plant will be closed down.

Additional facts regarding the plants operations are as follows

1. Due to Denver Covers 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.
2. Approximately 400 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 Covers base pay of $18.80 per hour, which is the highest in the area. A clause in Denver Covers 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 $1.5 million for the plant closing.
3. Some employees would probably choose early retirement because The Vice Company has an excellent pension plan. In fact, $3 million of the annual pension expense would continue whether Denver Cover is open or not.
4. Vosilo and his staff would not be affected by the closing of the Denver Cover. They would still be responsible for administering three other area plants.
5. If the Denver Cover Plant were closed, the company would realize about $3.2 million salvage value for the equipment and building. 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.
6. 

2. Complete the excel worksheet attached to the assignment. Prepare a financial analysis that will be used in deciding whether or not to close Denver Cover Plant. It is recommended to identify the following items before performing the financial analysis: The annual budgeted costs that are relevant to the decision regarding closing the plant (show the dollar amounts and totals). The annual budgeted costs that are irrelevant to the decision regarding closing the plant and explain why they are irrelevant (again show the dollar amounts and totals). Any nonrecurring costs that would arise due to the closing of the plant (use these costs to explain how they would affect your recommendation) (again show the dollar amounts and totals). b) Analysis header - The analytical section should be based on your personal assessment of the financial results from the worksheet. Develop your analysis using percentages and/or relevant dollar totals/balances. This section has the highest point value and should address the following: Without regards to costs, identify the advantages of continuing to obtain covers from the company's own Denver Cover Plant. Using the data prepared in the worksheet, make a recommendation to Vosilo, whether or not the plant should close. What is the financial advantage (disadvantage) to closing the plant? Are there any additional revenues or costs not specifically mentioned in the problem that The Vice Company should consider before making a decision. Denver Cover Plant Annual Budget for Operating Costs $14,000,000 $13,100,000 900,000 4,000,000 $18,000,000 Materials. Labor: Direct.. Supervision........ Indirect plant... Overhead: Depreciation - equipment..... Depreciation - building... Pension expense...... Plant manager and staff.. Corporate expenses*. 3,200,000 7,000,000 5,000,000 800,000 4,000,000 $20,000,000 Total budgeted costs... $52,000,000 * Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs. Denver Cover Plant Denver Cover Plant Relevant Costs Irrelevant Costs Denver Cover Plant Denver Cover Plant Financial Analysis on Plant Closure Nonrecurring Costs 2. Complete the excel worksheet attached to the assignment. Prepare a financial analysis that will be used in deciding whether or not to close Denver Cover Plant. It is recommended to identify the following items before performing the financial analysis: The annual budgeted costs that are relevant to the decision regarding closing the plant (show the dollar amounts and totals). The annual budgeted costs that are irrelevant to the decision regarding closing the plant and explain why they are irrelevant (again show the dollar amounts and totals). Any nonrecurring costs that would arise due to the closing of the plant (use these costs to explain how they would affect your recommendation) (again show the dollar amounts and totals). b) Analysis header - The analytical section should be based on your personal assessment of the financial results from the worksheet. Develop your analysis using percentages and/or relevant dollar totals/balances. This section has the highest point value and should address the following: Without regards to costs, identify the advantages of continuing to obtain covers from the company's own Denver Cover Plant. Using the data prepared in the worksheet, make a recommendation to Vosilo, whether or not the plant should close. What is the financial advantage (disadvantage) to closing the plant? Are there any additional revenues or costs not specifically mentioned in the problem that The Vice Company should consider before making a decision. Denver Cover Plant Annual Budget for Operating Costs $14,000,000 $13,100,000 900,000 4,000,000 $18,000,000 Materials. Labor: Direct.. Supervision........ Indirect plant... Overhead: Depreciation - equipment..... Depreciation - building... Pension expense...... Plant manager and staff.. Corporate expenses*. 3,200,000 7,000,000 5,000,000 800,000 4,000,000 $20,000,000 Total budgeted costs... $52,000,000 * Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs. Denver Cover Plant Denver Cover Plant Relevant Costs Irrelevant Costs Denver Cover Plant Denver Cover Plant Financial Analysis on Plant Closure Nonrecurring Costs