Chapter 6 production manager for the company His budget as the regional manager is charged to the Denver Ted Vasilo is the plant manager of the Denver Cover Plant but also serves as the regional Cover Mant Vosilo has just heard that QualSupport has received a bid from an outside vendor to supply the equivalent of the entire annual output of the Denver Cover Plant for $35 million. Vosilo wa astonished at the low outside bid because the budget for the Denver Cover Plant's operating costs for the upcoming year was set at $52 million. If this bid is accepted, the Denver Cover Plant will he closed down. The budget for Denver Cover's operating costs for the coming year is presented below, 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 Total budgeted costs 3,200,000 7,000,000 5,000,000 800,000 4,000,000 20,000,000 $52,000,000 Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs. a. Additional facts regarding the plant's operations are as follows: Due to Denver Cover's commitment to use high-quality fabrics in all of its products, the Pur- chasing Department was instructed to place blanket purchase orders with major suppliers 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. b. 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 Cover's 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 year. Some employees would probably choose early retirement because QualSupport has an excel lera pension plan. In fact, 83 million of the annual pension expense would continue whether Denver Cover is open or not. d Vosilo and his staff would not be affected by the closing of Denver Cover. They would still be responsible for administering three other area plants. If the Deover Cover Plant were closed, the company would realize about $3.2 million salvare value for the equipment and building. If the plant remains open, there are no plans to make aby unificant investments in new equipment or buildings. The old equipment is adequate and should last indefinitely Required: Without gard to ensis, identify the advantages to QualSupport Corporation of continuing obtain covers from its own Denver Cover Plant e 1