Dover Custom PlantIts Future? Premiere Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a number of plants around the world, including the Dover Custom Plant, which makes seat covers. Tom Vandiver is the plant manager of the Dover Custom Plant but also serves as the regional production manager for the company. His budget as the regional manager is charged to the Dover Custom Plant. Tom Vandiver has just heard that Premiere Corporation has received a bid from an outside vendor to supply the equivalent of the entire annual output of the Dover Custom Plant for $35 million. Vandiver was astonished at the low outside bid because the budget for the Dover Custom Plants operating costs for the upcoming year was set at $52 million. If this bid is accepted, the Dover Custom Plant will be closed down. The budget for Dover Customs operating costs for the coming year is presented below.

Dover Custom Plant Annual Budget for Operating Costs

Materials.................................................. $14,000,000

Labor: Direct......... $13,100,000

Supervision........ 900,000

Indirect plant labor........ 4,000,000 18,000,000

Overhead: Depreciationequipment.................. 3,200,000

Depreciationbuilding..................... 7,000,000

Pension expense................................ 5,000,000

Plant manager and staff..... 800,000

Corporate expenses*.......................... 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.

Additional facts regarding the plants operations are as follows:

1. Due to Dover Customs 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 Dover Customs base pay of $18.80 per hour, which is the highest in the area. A clause in Dover Customs 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.

3. Some employees would probably choose early retirement because Premiere Corporation has an excellent pension plan. In fact, $3 million of the annual pension expense would continue whether Dover Custom is open or not.

4. Tom Vandiver and his staff would not be affected by the closing of Dover Custom. They would still be responsible for administering three other area plants.

5. If the Dover Custom 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.

Required:

1. Without regard to costs, identify the advantages to Premiere Corporation of continuing to obtain covers from its own Dover Custom Plant.

2. Premiere Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Dover Custom Plant. Management has asked you to identify: a. The annual budgeted costs that are relevant to the decision regarding closing the plant (show the specific dollar amounts in a professional format). 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 specific dollar amounts in a professional format). 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 specific dollar amounts in a professional format).

3. Looking at the data you have prepared in (2) above, should the plant be closed? Show computations in a professional format and fully explain your answer. Be specific.

4. Identify any other factors not specifically mentioned in the problem that Premiere Corporation should consider before making a decision; give thought to factors related to revenues and costs, as well as nonfinancial factors.