PLANT CLOSURE (30%) 1. A chemical factory has a number of chemical plants on its site. There is one main plant, Plant "A", which provides feedstocks for the other plants. Plant "B" is an old plant, which uses an obsolete process, has very high operating and maintenance costs, and has some safety problems, which will require fixing if the plant is to continue to operate in the future. The site budget shows that Plant "B" has an ex works cost of $600 per tonne, consisting of $200 per tonne for variable costs and $400 per tonne for the fixed cost. The net realisation (or revenue) from sales is $500 per tonne. The current production rate is 12,000 tonnes per annum and is not expected to change if the plant continues to operate Plant "B" will have a number of effects on the operation of the overall site if it is shut down. It requires that the feedstock be of a higher purity than any of the other plants, which use it. It also is able to accept waste from other plants and convert to it to saleable product. If plant "B" is shutdown there will a significant cost associated with the disposal of the waste product The accountants have proposed that Plant "B" be shut down. You have been asked to examine the economics of the continued operation of the plant. You have been told that if it is shutdown, the plant will be demolished and any employees who cannot be gainfully employed will be made redundant You start out by looking at the effects that the closure of the plant will have in the site manning. You assess that the following positions will become redundant: 17 shift operators (a) (b) 4 day process workers 10 maintenance workers (c) 3 workshop tradesman 1 storeman (d) (e) (f) 1warehouse operator (g) 1 laboratory technician (h) I plant superintendent 1 maintenance supervisor (i) You next have a look at the maintenance budget. You estimate that the cost of maintenance materials is $1,600,000 per annum. Contract maintenance costs are $200,000 per annum. Operating supplies excluding raw materials cost $50,000 per annum After a detailed assessment of the plant unit usages you assess that the costs of incremental purchased raw materials attributable to Plant "B" is $2,000,000 per annum. The closure of Plant "B" will result in site savings of $400,000 per annum. The cost of disposing of waste that previously was taken by Plant "B" is estimated to be $220,000 per annum. It has been estimated that the cost of implementing the required safety modifications on Plant "B" is $2,000,000. The maintenance cost attributable to these safety modifications is estimated to be 4 % of the capital cost. If Plant "B" is shutdown it will have to be demolished and the area it stood on will have to be cleaned up. The net cost of demolition and cleanup is estimated to be $480,000. This expense is not an allowable tax deduction. Next you obtain the data on wages costs, wages oncosts and redundancy payments from the Pay Office and the Personnel department. The results of your enquiries are summarised below Average Salary Position Wages Oncosts Payout Shift operator 45% 12,000 27,000 Process worker 18,000 25% 8,000 Maintenance worker 22,000 25% 10,000 Workshop tradesman Warehouse operator 20,000 25% 10,000 16,000 25% 6,000 Storeman 17,000 25% 7,000 Laboratory technician 21,000 25% 10,000 Plant superintendent 35,000 30% 20,000 28,000 Maintenance supervisor 30% 18,000 The payout amount is the redundancy and any lumpsum payout components, which are not covered by the normal wages oncosts' provisions. The payout is related to salary and years of service. You also find out that the plant has $850,000 in working capital, which can be reclaimed, when the plant is shutdown. If the plant is not shutdown immediately it would be operated for five years and would then be shutdown and scrapped. The tax life for the safety modifications is five years. The tax rate is 30% and tax is payable in the same year that the income is earned. The discount rate for NPV calculations is 12.5%. You now believe that you have enough information to assess the economics of continuing to operate Plant "B" (a) What is your recommendation? (b) Would your recommendation change if the safety modifications were not required? Explanatory Notes oncosts are costs that are incurred in addition to the direct salary or t that is paid to an employee; Wage while they are employed, and are usually expressed as a percentage of the employee's salary (see slide # 30 Employee Oncosts in the session #3 handout) . The total cost for an employee is the sum of the employee salary plus the associated oncosts. PLANT CLOSURE (30%) 1. A chemical factory has a number of chemical plants on its site. There is one main plant, Plant "A", which provides feedstocks for the other plants. Plant "B" is an old plant, which uses an obsolete process, has very high operating and maintenance costs, and has some safety problems, which will require fixing if the plant is to continue to operate in the future. The site budget shows that Plant "B" has an ex works cost of $600 per tonne, consisting of $200 per tonne for variable costs and $400 per tonne for the fixed cost. The net realisation (or revenue) from sales is $500 per tonne. The current production rate is 12,000 tonnes per annum and is not expected to change if the plant continues to operate Plant "B" will have a number of effects on the operation of the overall site if it is shut down. It requires that the feedstock be of a higher purity than any of the other plants, which use it. It also is able to accept waste from other plants and convert to it to saleable product. If plant "B" is shutdown there will a significant cost associated with the disposal of the waste product The accountants have proposed that Plant "B" be shut down. You have been asked to examine the economics of the continued operation of the plant. You have been told that if it is shutdown, the plant will be demolished and any employees who cannot be gainfully employed will be made redundant You start out by looking at the effects that the closure of the plant will have in the site manning. You assess that the following positions will become redundant: 17 shift operators (a) (b) 4 day process workers 10 maintenance workers (c) 3 workshop tradesman 1 storeman (d) (e) (f) 1warehouse operator (g) 1 laboratory technician (h) I plant superintendent 1 maintenance supervisor (i) You next have a look at the maintenance budget. You estimate that the cost of maintenance materials is $1,600,000 per annum. Contract maintenance costs are $200,000 per annum. Operating supplies excluding raw materials cost $50,000 per annum After a detailed assessment of the plant unit usages you assess that the costs of incremental purchased raw materials attributable to Plant "B" is $2,000,000 per annum. The closure of Plant "B" will result in site savings of $400,000 per annum. The cost of disposing of waste that previously was taken by Plant "B" is estimated to be $220,000 per annum. It has been estimated that the cost of implementing the required safety modifications on Plant "B" is $2,000,000. The maintenance cost attributable to these safety modifications is estimated to be 4 % of the capital cost. If Plant "B" is shutdown it will have to be demolished and the area it stood on will have to be cleaned up. The net cost of demolition and cleanup is estimated to be $480,000. This expense is not an allowable tax deduction. Next you obtain the data on wages costs, wages oncosts and redundancy payments from the Pay Office and the Personnel department. The results of your enquiries are summarised below Average Salary Position Wages Oncosts Payout Shift operator 45% 12,000 27,000 Process worker 18,000 25% 8,000 Maintenance worker 22,000 25% 10,000 Workshop tradesman Warehouse operator 20,000 25% 10,000 16,000 25% 6,000 Storeman 17,000 25% 7,000 Laboratory technician 21,000 25% 10,000 Plant superintendent 35,000 30% 20,000 28,000 Maintenance supervisor 30% 18,000 The payout amount is the redundancy and any lumpsum payout components, which are not covered by the normal wages oncosts' provisions. The payout is related to salary and years of service. You also find out that the plant has $850,000 in working capital, which can be reclaimed, when the plant is shutdown. If the plant is not shutdown immediately it would be operated for five years and would then be shutdown and scrapped. The tax life for the safety modifications is five years. The tax rate is 30% and tax is payable in the same year that the income is earned. The discount rate for NPV calculations is 12.5%. You now believe that you have enough information to assess the economics of continuing to operate Plant "B" (a) What is your recommendation? (b) Would your recommendation change if the safety modifications were not required? Explanatory Notes oncosts are costs that are incurred in addition to the direct salary or t that is paid to an employee; Wage while they are employed, and are usually expressed as a percentage of the employee's salary (see slide # 30 Employee Oncosts in the session #3 handout) . The total cost for an employee is the sum of the employee salary plus the associated oncosts