KMB 663 CA# 0701 Prof. S. HAN [Case Study #06/QualSupport Corporation QualSuppor
ID: 2565358 • Letter: K
Question
KMB 663 CA# 0701 Prof. S. HAN [Case Study #06/QualSupport Corporation QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a number of plants around the world, including the Denver Cover Plant, which makes seat covers. Ted Vosilo is the plant manager of the Denver Cover Plant but also serves as the regional production manager for the company. His budget as the regional manager is charged to the Denver Cover Plant. Vosilo has just heard that QualSupport has received a bid from an outside vendor to supply the equivalent of the entire annual output of the Denver Cover Plant for $35 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plants operating costs for the upcoming year was set at $52 million. If this bid is accepted, the Denver Cover Plant will be closed down. The budget for Denver Cover's operating costs for the coming year is presented below. Additional facts regarding the plant's operations are as follows: a. Due to Denver Cover's 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 suficient materias 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. b. 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. A employees would have difficulty matching Denver Cover's base pay of $18.80 per hour, which is the highest in the area. A clause in Denver Cover's 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.S million for the year c. Some employees would probably choose early retirement because QualSupport has an excellent pension planIn fact, $3 million of the annual pension expense would continue whether Denver Cover is open or not. Vosilo and his staff would not be affected by the closing of Denver Cover. They would still be responsible for administering three other area plants d. e If the Denver Cover Plant were closed, the company would realize about $3.2 million salvage value for the equipment and building. If the plant remains open, there areExplanation / Answer
1. The advantage of obtaining covers from its ownDenver cover plant would be quality assurance. As the Denver cover plant is committed to quality in its products. Thus there will be proper assurance of quality if covers are obtained from denver cover plant.
2.Non recurring costs regarding closure of plant
Termination charges for the order placed for blankets i.e 20% of the direct cost of materials because these costs will have to be paid if plant is closed. So it should be taken into consideration.
= 20% × 14,000,000. = $2800000
Cost to provide employment assistance to former employees i.e 1.5 million dollar is also relevant because it will have to be incurred on closure of plant.
Irrelevant cost for the decision regarding closure of plant
Annual pension expense of 3 million dollar is irrelevant because it will have to be incurred in any situation whether plant is closed or not. Thus it is irrelevant.
Overhead cost of $20,000,000 is also irrelevant because it will be incurred in any situation.
Relevant cost regarding closure of plant
Material, Direct labour, supervision and indirect labour would be relevant cost because it will not be incurred if plant is closed.
= $18,000,000+$14,000,000 = $32,000,000
3.
Cost if covers are procured from market = $35 million
(-) relevant cost if plant is not closed = $32 million
(-)non recurring cost of closing the plant = 2.8+1.5 million = $4.3 million
= profit in purchasing from outside vendor = -1.3 milion
Thus there is loss of 1.3 million dollar if purchases are made from outside vendor.
So the covers should be prepared by denver plant itself.
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