CASE 730 Plant Closing Decision [LO 71, LO 72]

Mobile Seating Corporation manufactures seats for automobiles, vans, trucks, and boats. The company has a number of plants, including the Greenville Cover Plant, which makes seat covers.

Miriam Restin is the plant manager at the Greenville Cover Plant but also serves as the regional production manager for the company. Her budget as the regional manager is charged to the Greenville Cover Plant.

Restin has just heard that Mobile Seating has received a bid from an outside vendor to supply the equivalent of the entire annual output of the Greenville Cover Plant for $21 million. Restin was astonished at the low outside bid because the budget for the Greenville Cover Plants operating costs for the coming year was set at $24.3 million. If this bid is accepted, the Greenville Cover Plant will be closed down.

The budget for the Greenville Cover Plants operating costs for the coming year is presented on the following page. Additional facts regarding the plants operations are as follows:

a.Due to the Greenville Cover Plants 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 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 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 the production workers would have difficulty matching the Greenville Cover Plants base pay of $12.50 per hour, which is the highest in the area. A clause in Greenville Covers 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 $0.8 million.

c.Some employees would probably choose early retirement because Mobile Seating Corporation has an excellent pension plan. In fact, $0.7 million of the annual pension expense would continue whether the Greenville Cover Plant is open or not.

d.Restin and her regional staff would not be affected by the closing of the Greenville Cover Plant. They would still be responsible for running three other area plants.

e.If the Greenville Cover Plant were closed, the company would realize about $2 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.

Greenville Cover Plant Annual Budget for Operating Costs Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,000,000 Labor: Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,700,000 Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 Indirect plant . . . . . . . . . . . . . . . . . . . . . . . . 1,900,000 9,000,000 Overhead: Depreciationequipment . . . . . . . . . . . . . . 1,300,000 Depreciationbuilding . . . . . . . . . . . . . . . . 2,100,000 Pension expense . . . . . . . . . . . . . . . . . . . . . . 1,600,000 Plant manager and staff . . . . . . . . . . . . . . . . . 600,000 Corporate expenses* . . . . . . . . . . . . . . . . . . . 1,700,000 7,300,000 Total budgeted costs . . . . . . . . . . . . . . . . . . . . . $24,300,000 *Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

1.Without regard to costs, identify the advantages to Mobile Seating Corporation of continuing to obtain covers from its own Greenville Cover Plant.

2.Mobile Seating Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Greenville 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 nonrecurring 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 have 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 Mobile Seating Corporation should consider before making a decision.