Question

The company produces seats for auto, vans, trucks, and boats. The company has several plants, including the New Jersey plant, which makes car covers. Goodman is the plant manager at the New Jersey plant but also serves as the production manager. Goodman has just heard that Rutgers company has received a bid from an outside vendor to offer the same amount of the entire annual output of the New Jersey plant for $21 million. Goodman was surprised at the low outside bid due to that the budget for the New Jersey Plant's operating costs for the coming year was set at $24.3 million. if this bid is accepted by the plant, the New Jersey plant will go out of bankruptcy. The budget for the New Jersy plant's operating costs for the next year is below. Additional information is given as follows.
1. Due to the New Jersey plant prefer high-quality for all products, the purchasing department prefers to place orders of good materials for the coming year. If these orders are canceled as consequence of the plant closing, termination fees would amount to 25% of the cost of direct materials.
2. Around 350 employees will become unemployed if the plant is closed, which contain all of the direct laborers and supervisors, management and staff, and the plumbers, electricians, and other skilled workers classified as indirect plant workers. Some of the workers would have difficulty finding new jobs. Nearly all the production labors would have difficulty matching the New Jersey plant at $12.5 per hour, which is the highest. Rutgers Company should provide some assistance and job training to its former employees for 12 months after closing a plant. The estimated fees for this service would be $0.8 million.
3. Some employees might choose early retirement because Rutgers Company has a good pension plan. Actually, $0.7 million of the annual pension expense would continue whether the New Jersey plant is open or not
4. Goodman and his coworkers would not be affected by the closing of the New Jersey plant, they would still be responsible for three other area plants
5. If the New Jersey plant were closed, Rutgers Company would realize about $2 million salvage value for the equipment in the plant. If the plant remains open, there are no plans to make any significant investments in new equipment or buildings. The old equipment is adequate for the job and should last indefinitely.
New Jersey Plant
The annual budget for costs
Materials		$80,000,000.00
Labor:
Direct	$6,700,000.00
Supervison	$400,000.00
Indirect Plant	$1,900,000.00	$9,000,000.00
MOH:
Deprecation for equipments	$1,300,000.00
Deprecation for buildings	$2,100,000.00
Pension expense	$1,600,000.00
Plant manager and staff	$600,000.00
Corporate expense	$1,700,000.00	$7,300,000.00
Total		$24,300,000.00
*Fixed expenses are allocated to plants and other operating units based on total budgeted wage and salary costs.
Questions:
1.Without regard to costs, find the merits to Rutgers Company of continuing to obtain products from the New Jersey plant.
2. Company is about to prepare a financial analysis that will be used in deciding whether or not to close the New Jersey Plant. CEO has asked you to pay attention to items: a.Show the annual budgeted costs to make the decision about the closing of the New Jersey plant. b.Present the annual budgeted costs that are not relevant to the decision regarding the closing of New Jersey the plant and explain why they are not relevant. c.There are nonrecurring costs that would arise due to the closing of the plant and please explain how they would affect the decision.
3.Please refer to the data you have prepared in (2) above, do you think the New Jersey plant be closed? Show computations and please explain your answer.
4.Please find any sales revenues or costs not specifically provided in the information that Rutgers Compnay should consider before making a decision.
5.What suggestions do you think about reducing the costs?

Answer 1

	Question no 1
	1.Without regard to costs, find the merits to Rutgers Company of continuing to obtain products from the New Jersey plant.
	Answer
	Merits of continuing to obtain products from the New Jersey plant are as follows
1	if this bid is accepted by the plant, the New Jersey plant will go out of bankruptcy ,which is loss of goodwill (brand) to the Company
2	If bid is accepted the company will have to compensation fees which would be 25% of the cost of direct materials. Which can be avoided by continuing to obtain the products from New jersey plant
3	Around 350 employee will loose job which includes experience and skilled employee which will also pose difficulty for finding job which will cost the Company $ 0.8 million
4	Existing equipment or buildings can be used for indefinitely therfore no no need to make any significant investments in new equipment or buildings which will save capital of the company
	Question no 4
	4.Please find any sales revenues or costs not specifically provided in the information that Rutgers Compnay should consider before making a decision
	the Following details are missing
1	No of units produced
2	Sales revenue and sale price per unit
3	Variable cost per unit
3	Detailed of budgetted fixed cost in total and per unit
4	Shut down cost to be incurred when you close the palnt
5	Any labour unrest due to closure of the plant
6	Legal requiement
7	Due diligence and analysis of the buyer
	Question no 5
	5.What suggestions do you think about reducing the costs?
1	The Company should try to procure material at reduced rate without effecting the quality
2	Control of fixed cost
3	Tyr to use 100% capacity of the plant
4	Increase sales price if market has a scope for the same Question no 1 1.Without regard to costs, find the merits to Rutgers Company of continuing to obtain products from the New Jersey plant. Answer Merits of continuing to obtain products from the New Jersey plant are as follows 1 if this bid is accepted by the plant, the New Jersey plant will go out of bankruptcy ,which is loss of goodwill (brand) to the Company 2 If bid is accepted the company will have to compensation fees which would be 25% of the cost of direct materials. Which can be avoided by continuing to obtain the products from New jersey plant 3 Around 350 employee will loose job which includes experience and skilled employee which will also pose difficulty for finding job which will cost the Company $ 0.8 million 4 Existing equipment or buildings can be used for indefinitely therfore no no need to make any significant investments in new equipment or buildings which will save capital of the company Question no 4 4.Please find any sales revenues or costs not specifically provided in the information that Rutgers Compnay should consider before making a decision the Following details are missing 1 No of units produced 2 Sales revenue and sale price per unit 3 Variable cost per unit 3 Detailed of budgetted fixed cost in total and per unit 4 Shut down cost to be incurred when you close the palnt 5 Any labour unrest due to closure of the plant 6 Legal requiement 7 Due diligence and analysis of the buyer Question no 5 5.What suggestions do you think about reducing the costs? 1 The Company should try to procure material at reduced rate without effecting the quality 2 Control of fixed cost 3 Tyr to use 100% capacity of the plant 4 Increase sales price if market has a scope for the same

a.Show the annual budgeted costs to make the decision about the closing of the New Jersey plant.
annual budgeted costs is as follows
			Remarks
Material Cost		80,000,000	Variable cost the company has to incur to run the question which is relevant for decision making
Labor:			Variable cost the company has to incur to run the question which is relevant for decision making
Direct	6,700,000		Variable cost the company has to incur to run the question which is relevant for decision making
Supervison	400,000		Variable cost the company has to incur to run the question which is relevant for decision making
Indirect Plant	1,900,000		Variable cost the company has to incur to run the question which is relevant for decision making
MOH:		9,000,000
Deprecation for equipments			Non cash expenses and it is historical cost and depreciation is nothing but systematic charges of capital expenditure this expenses is not relevant in decision making
Deprecation for buildings			Non cash expenses and it is historical cost and depreciation is nothing but systematic charges of capital expenditure this expenses is not relevant in decision making
Pension expense	900,000		$0.7 million is irrelecvant cost as it has be incurred whether you close the company and continue to production
Plant manager and staff			It is also irrelevant cost as the company will absorb these employee in some other Units
Corporate expense			this is allocation of overhead which is irrelevant in decision making
Fixed budgetted exp '=7200000/96*67	5,025,000		as it is given in question that fixed budgtted cost are apportioned in the ration of salary cost and wage cost so difference between $ 24,300,000.00 and total of expenses given in question $ 96,300,000 would be budgetted fixed cost $ 72,000,000 which will apportioned in the ratio of wage and salary cost
		5,925,000
Fixed cost
Wage	6,700,000
salary cost	2,900,000
	9,600,000
in the ratio of 67:29
Total of continuing the plant		94,925,000
		94,925,000
b.Present the annual budgeted costs that are not relevant to the decision regarding the closing of New Jersey the plant and explain why they are not relevant.
Deprecation for equipments	1,300,000		Non cash expenses and it is historical cost and depreciation is nothing but systematic charges of capital expenditure this expenses is not relevant in decision making
Deprecation for buildings	2,100,000		Non cash expenses and it is historical cost and depreciation is nothing but systematic charges of capital expenditure this expenses is not relevant in decision making
Plant manager and staff	600,000		It is also irrelevant cost as the company will absorb these employee in some other Units
Pension expense	700,000		$0.7 million is irrelecvant cost as it has be incurred whether you close the company and continue to production
Corporate expense	1,700,000		this is allocation of overhead which is irrelevant in decision making
c.There are nonrecurring costs that would arise due to the closing of the plant and please explain how they would affect the decision
nonrecurring costs			Answer
Termination fees payable for cancelling the material supply contract which will amount to 25% of material cost i.e. 20,000,000			It is relevant cost which need to be paid to close plant as it include outflow of cash they are relevant cost
assistance and job training to its former employees for 12 months after closing a plant. The estimated fees for this service would be $0.8 million.			It is relevant cost which need to be paid to close plant as it include outflow of cash they are relevant cost
annual pension expense			Since the some of the employee may opt for early retirement which will result in addition cost to the Company and it is relevant cost in making the decision for closing the plant
salvage value of $ 2 Million			it is not a cost but it is one time gain from disposal of plant which will off set the one time cost of closing the plant
considering the cost and salvege value we can conclude that Company has incur the one time cost $0.8 million and addiion pension expenses after netting of the salvage value with charges for cancellation of material supply contracts
3.Please refer to the data you have prepared in (2) above, do you think the New Jersey plant be closed? Show computations and please explain your answer.
1.based on the above cost sheet the cost to run the company is $ 94,925,000 which very less that budgetted cost in the question it is profitable to constinue to produce and entire output of the plant can be sold at $ 21 million which more than the relevant cost so the company should continue to produce
2.Existing equipment or buildings can be used for indefinitely therfore no no need to make any significant investments in new equipment or buildings which will save capital of the company
3. The Company will loose 350 skilled and experianced staff who are direct laborers and supervisors, management and staff, and the plumbers, electricians, and other skilled workers classified as indirect plant workers. In the event of closer the company has to incur the $0.8 million training and other cost which can be avoided
4The Company already has good branf reputation for producing the high quality product, if you close the plant and the company has to give compensation of 20 million