QualSupport Corporation manufactures seats for automobiles, vans,trucks, and various recreational vehicles. The company has a numberof plants around the world, including the Denver Cover Plant, whichmakes seat covers.

Ted Vosilo is the plant manager of the Denver Cover Plant but alsoserves as the regional production manager for the company. Hisbudget as the regional manager is charged to the Denver CoverPlant.

Vosilo has just heard that QualSupport has received a bid from anoutside vendor to supply the equivalent of the entire annual outputof the Denver Cover Plant for $35 million. Vosilo was astonished atthe low outside bid because the budget for the Denver Cover Plant’soperating costs for the upcoming year was set at $52 million. Ifthis bid is accepted, the Denver Cover Plant will be closeddown.

The budget for Denver Cover’s operating costs for the coming yearis presented below.

Denver Cover Plant Annual Budget for Operating Costs
Materials		  $ 14,000,000
Labor:
Direct	$13,100,000
Supervision	900,000
Indirectplant	    4,000,000	18,000,000
Overhead:
Depreciation—equipment	3,200,000
Depreciation—building	7,000,000
Pensionexpense	5,000,000
Plant manager andstaff	800,000
Corporateexpenses*	    4,000,000	20,000,000
Total budgeted costs		$52,000,000
*Fixed corporate expenses allocated to plants andother operating units based on total budgeted wage and salarycosts.

Additional facts regarding the plant’s operations are asfollows:

1. Due to Denver Cover’s commitment to use high-quality fabrics inall of its products, the Purchasing Department was instructed toplace blanket purchase orders with major suppliers to ensure thereceipt of sufficient materials for the coming year. If theseorders are canceled as a consequence of the plant closing,termination charges would amount to 20% of the cost of directmaterials.

2. Approximately 400 plant employees will lose their jobs if theplant is closed. This includes all of the direct laborers andsupervisors as well as the plumbers, electricians, and otherskilled workers classified as indirect plant workers. Some would beable to find new jobs while many others would have difficulty. Allemployees would have difficulty matching Denver Cover’s base pay of$18.80 per hour, which is the highest in the area. A clause inDenver Cover’s contract with the union may help some employees; thecompany must provide employment assistance to its former employeesfor 12 months after a plant closing. The estimated cost toadminister this service would be $1.5 million for the year.

3. Some employees would probably choose early retirement becauseQualSupport has an excellent pension plan. In fact, $3 million ofthe annual pension expense would continue whether Denver Cover isopen or not.

4. Vosilo and his staff would not be affected by the closing ofDenver Cover. They would still be responsible for administeringthree other area plants.

5. If the Denver Cover Plant were closed, the company would realizeabout $3.2 million salvage value for the equipment and building. Ifthe plant remains open, there are no plans to make any significantinvestments in new equipment or buildings. The old equipment isadequate and should last indefinitely.

Required:

1. Without regard to costs, identify the advantages to QualSupportCorporation of continuing to obtain covers from its own DenverCover Plant.

2. QualSupport Corporation plans to prepare a financial analysisthat will be used in deciding whether or not to close the DenverCover Plant. Management has asked you to identify:

   1. The annual budgeted costs that are relevant to the decisionregarding closing the plant (show the dollar amounts).

   2. The annual budgeted costs that are irrelevant to thedecision regarding closing the plant and explain why they areirrelevant (again show the dollar amounts).

   3. Any nonrecurring costs that would arise due to the closing ofthe plant, and explain how they would affect the decision (againshow any dollar amounts).

3. Looking at the data you have prepared in (2) above, what is thefinancial advantage (disadvantage) of closing the plant? Showcomputations and explain your answer.

4. Identify any revenues or costs not specifically mentioned in theproblem that QualSupport should consider before making adecision.