GianAuto Inc. manufactures parts and components for manufacturers and suppliers of parts for automobiles, and trucks. Sales have increased each year based in part on the company's excellent record of customer service and reliability.The industry as a whole has also grown as auto manufacturers continue to outsource more of their production, especially to cost- efficient manufactures such a s GianAuto. To take advantage of lower wage rates and favorable business environments around the world, GianAuto has located its plants in six different countries around the world. Among the various GianAuto plants around the world is theDenver Cover Plant, one of GianAuto's earliest plants.The Denver Cover Plant prepares and sews coverings made primarily of leather and upholstery fabric and ships them to other GianAuto plants where they are used to cover seats, headboards, door panels, a n d other GianAuto products. Ted Vosilo is the plant manager for the Denver Cover Plant, which was the first GianAuto plant in the region. As other area plants were opened, Ted was given the responsibility for managing them in recognition of his management ability. He functions as a regional manager although the budget for him and his staff is charged to the Denver Cover Plant. Ted has just received are port indicating that GianAuto could purchase the entire annual output ofDenver Cover from suppliers in other countries for $62 million. He was astonished at the low outside price because the budget for Denver Cover Plant's operating costs for the coming year was set at $82 million. He believes that GianAuto will have to close operations at Denver Cover to realize the$ 2 0 million in annual cost savings. Denver Cover's budget for operating costs for the coming year follows: DENVER COVER PLANT Budget for Operating Costs For the Year Ending December31,2022 (000somitted) Direct materials $32.000 Labor: Direct $23,000 Supervision $3.000 Indirect plant $4.000 Overhead: Depreciation-equipment $5.000 $30.000 Depreciation-building $3.000 Pension expense $4.000 Plant manager and staff $2,000 Corporate allocation $6,000 $20.000 Total budgeted costs $82.000 Outside supplier's bid price on output coming from DenverCover Plant = $62.000 (000omitted) Additional facts regarding the plant's operations are as follows: Due to DenverCover's commitment to use high-quality fabrics in all its products, the purchasing department placed blanket purchase orders with major suppliers to ensure the receipt of sufficient materials for the coming year. If these orders are canceled as a result of the plant closing, termination charges would amount to 10 percent of the cost of direct materials. Approximately400 plant employees will lose their jobs if the plant is closed. This includes all 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, but many would have difficulty doing so. Al employees would have difficulty matching Denver Cover's base pay of $14.40 per hour, the highest in the area. A clause in Denver Cover's contract with the union could help some employees; the company must provide employment assistance to its former employees for 12 months after a plant closing.The estimated cost to provide this assistance is $1 million for the year. Some employees would probably elect early retirement because GianAuto has an excellent plan. In fact, $2.4 million of the 2022 pension expense would continue whether Denver Cover is open or not. Ted and his staff would not be affected by closing Denver Cover. They would still be responsible for managing three other area plants. DenverCover considers equipment depreciation to be a variable cost and therefore uses the units-of-production method to depreciate its equipment. The company uses the straight-line method t o depreciate its building. Additional Data Cancellation charge (% ofDM cost)= Employment assistance charge (if plant is closed)= Non-avoidable portion of total pension expense = Requirements 10.0% $1,000 (in thousands) $2,400 (in thousands)

.1 Explain GianAuto's competitive strategy and how this strategy should be considered with regard to the Denver Plant decision. Identify the key strategic factors that should be considered in the decision. .

2 GianAuto Inc. wants you t o prepare an analysis of whether to close the Denver Cover Plant. Specifically, what are the estimated year-one cost savings from closing the plant (i.e., buying from an external supplier)? State your answer in thousands; round final answer to nearest thousand. What comparable savings would you expect in later years?

3. Discuss the financial analysis in (2) above with a consideration of global competition and GianAuto's competitive strategy.

Addibohal tacts nogardive the plants operesions ara as folown: moienats. moud be atia to ind new jpes, but reny would heve difiouty doing so. All erployess meud have diffeully matching the 2922 parsaion expense would continue whther Denver Cover is open or rol. wes planet. Cancehtetion thape of of DUt woet - Employment assistavee chape (Cpisent is chseed - Non avolideble portion of tosal pension expenie = 10.06 31,000 (n housands) 32,400 (n thousinds) srategr