Troncones Corporation manufactures various boat parts. The company has ten plants, including the Sierra Plant the Sierra Plant is the focus on this case study.

Alba Garcia serves as the Regional Manager for the Americas Region and is the Plant Manager of the Sierra Plant. Her budget as the regional manager is allocated to the Sierra Plant.

Alba Garcia has received a bid from an outside vendor to supply the entire annual output of the Sierra Plant for a cost of $20 million. Ms. Garcia must make a decision regarding accepting the outside bid and shutting the Sierra Plant versus keeping the plant open.

The budget for the Sierra Plants operating costs for the coming year is presented below.

Sierra Plant Annual Budget for Operating Costs
Materials				$	8,300,000
Labor:
Direct	$	8,600,000
Plant Supervision		400,000
Indirect plant workers (variable)		1,200,000			10,200,000
Overhead:
Depreciationequipment		1,500,000
Depreciationbuilding		1,650,000
Pension expense		1,300,000
Plant manager and staff		450,000
Corporate expenses*		1,600,000			6,500,000
Total budgeted costs				$	25,000,000

*Fixed corporate expenses are corporation costs allocated to the various plants.

Additional facts regarding the plants operations are as follows:

1. Materials: Due to the Troncones Corporations commitment to use high-quality fabrics in all of its products, the Purchasing Department was instructed to place yearly purchase orders with major suppliers to ensure materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 10% of the budgeted cost of direct materials.
2. Labor: Approximately 300 plant employees will lose their jobs if the plant is closed. This includes all of the direct laborers, plant supervisors and the indirect plant workers.

Some workers would be able to find new jobs while many others would have difficulty. All employees would have difficulty matching the Sierra Plants base pay of $12.00 per hour, which is the highest in the area. A clause in Sierras current contract with the union requires the company to provide employment assistance to its former employees for 12 months after a plant closing. The estimated cost to administer this service for the Sierra Plant would be $700,000 for the year.

3. Pension: $500,000 of the annual pension expense would continue whether the Sierra plant remains open or not.
4. Alba Garcia and her staff would not be affected by the closing of the Sierra Plant. They would still be responsible for administering the region.
5. If the Sierra Plant were closed, the company would realize about $2.5 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.

Required:

1. Before looking at the numbers, discuss the ethical factors and other non-numerical factors that are at play when considering a make or buy decision of this magnitude?

2. Troncones Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Sierra Plant. Management has asked you to identify:
3. 1. The annual budgeted costs that are relevant to the decision regarding closing the plant (annual means recurring costs, there are two non-recurring or one-time costs that you will list in part c).
   2. The annual budgeted costs that are not relevant to the decision regarding closing the plant.
   3. Any nonrecurring costs or benefits that would arise due to the closing of the plant (non-recurring means one-time).

3. Looking at the data you have prepared in (1) above,
4. 1. Calculate the financial advantage (disadvantage) of closing the plant. You should calculate this for both the first year and the years after the first year.
   3. Based on a full analysis (consider both the numbers and non-numerical factors in your final decision), should the plant be closed? Explain your decision in terms of the numbers and the ethical or non-numerical factors.