Questions
Two inventors, recently organized as Innovation, Inc., consult you regarding a planned new product.They have estimates...

Two inventors, recently organized as Innovation, Inc., consult you regarding a planned new product.They have estimates of the costs of materials, labor, overhead, and other expenses for 2016 but need to know how much to charge for each unit to earn a profit in 2016 equal to 15% of their estimated total long-term investment of $560,000 (ignore income taxes).

Their plans indicate that each unit of the new product requires the following:

Direct Material 4 lb. of a material costing $7 per lb.
Direct labor 2 hrs. of a metal former's time at $15.40 per hr.
0.6 hr. of an assembler's time at $11.20 per hr.

Major items of production overhead would be annual rent of $65,044 for a factory building, $40,124 rent for machinery, and $30,380 of indirect material. Other production overhead is estimated to be $326,592. Selling expenses are an estimated 30% of total sales, and non-factory administrative expenses are 20% of total sales.


The consensus at Innovation is that during 2016 10,000 units of product should be produced for selling and another 2,000 units should be produced for the next year's beginning inventory. Also, an extra 3,000 pounds of material will be purchased as beginning inventory for the next year. Because of the nature of the manufacturing process, all units started must be completed, so work in process inventories are negligible.

Required
a. Incorporate the above data into a schedule of estimated total manufacturing costs and compute the unit production cost for 2016.

Do not use negative signs with any of your answers.

Estimated Total Manufacturing Cost
For the Year Ended December 31,2016
Direct material:
Beginning materials inventory Answer
AnswerCost of materials purchasedEnding materials inventoryIndirect materials usedOther factory overhead Answer
Cost of material available Answer
Less: AnswerCost of materials purchasedEnding materials inventoryIndirect materials usedOther factory overhead Answer
Total materials used Answer
Less: AnswerCost of materials purchasedEnding materials inventoryIndirect materials usedOther factory overhead Answer
Direct materials used Answer
Direct labor Answer
Manufacturing overhead
Indirect material Answer
Building rent Answer
Machinery rent Answer
AnswerCost of materials purchasedEnding materials inventoryIndirect materials usedOther factory overhead Answer
Total manufacturing overhead Answer
Total manufacturing costs Answer
Round answer to two decimal places.
Product cost per unit Answer

b. Prepare an estimated income statement that would provide the target amount of profit for 2016.

Income Statement
For the Year Ended December 31,2016
AnswerCost of goods soldNet incomeAdministrative expensesSalesSelling expenses Answer
AnswerCost of goods soldNet incomeAdministrative expensesSalesSelling expenses Answer
Gross profit on sales Answer
Operating expenses:
AnswerCost of goods soldIndirect materialNet incomeSalesSelling expenses Answer
AnswerCost of goods soldNet incomeIndirect materialAdministrative expensesSales Answer Answer
AnswerCost of goods soldNet incomeAdministrative expensesSalesSelling expenses Answer

c. What unit sales price should Innovation charge for the new product?

$Answer

In: Accounting

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a...

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 $22.26 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant’s operating costs for the upcoming year was set at $25.56 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.

Denver Cover Plant
Annual Budget for Operating Costs
Materials $ 8,000,000
Labor:
Direct $ 7,300,000
Supervision 450,000
Indirect plant 2,400,000 10,150,000
Overhead:
Depreciation—equipment 1,700,000
Depreciation—building 2,500,000
Pension expense 1,200,000
Plant manager and staff 510,000
Corporate expenses* 1,500,000 7,410,000
Total budgeted costs $ 25,560,000

*Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

Additional facts regarding the plant’s operations are as follows:

  1. 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 sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 25% of the cost of direct materials.
  2. Approximately 360 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. All employees would have difficulty matching Denver Cover’s base pay of $12.60 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 $0.79 million for the year.
  3. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $0.77 million of the annual pension expense would continue whether Denver Cover is open or not.
  4. 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.
  5. If the Denver Cover Plant were closed, the company would realize about $2 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. The old equipment is adequate and should last indefinitely.

Required:

1. QualSupport Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Denver Cover Plant. Management has asked you to identify:

a. The annual budgeted costs that are relevant to the decision regarding closing the plant.

b. The annual budgeted costs that are not relevant to the decision regarding closing the plant.

c. Any nonrecurring costs that would arise due to the closing of the plant.

d. Looking at the data you have prepared in (2) above,

e. Calculate the financial advantage (disadvantage) of closing the plant.

f. Should the plant be closed?

In: Accounting

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a...

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 $22.88 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant’s operating costs for the upcoming year was set at $26.18 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.

Denver Cover Plant
Annual Budget for Operating Costs
Materials $ 8,400,000
Labor:
Direct $ 7,600,000
Supervision 490,000
Indirect plant 1,400,000 9,490,000
Overhead:
Depreciation—equipment 1,700,000
Depreciation—building 3,100,000
Pension expense 1,800,000
Plant manager and staff 590,000
Corporate expenses* 1,100,000 8,290,000
Total budgeted costs $ 26,180,000

*Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

Additional facts regarding the plant’s operations are as follows:

  1. 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 sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 25% of the cost of direct materials.
  2. Approximately 340 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. All employees would have difficulty matching Denver Cover’s base pay of $12.20 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 $0.71 million for the year.
  3. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $0.68 million of the annual pension expense would continue whether Denver Cover is open or not.
  4. 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.
  5. If the Denver Cover Plant were closed, the company would realize about $2.1 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. The old equipment is adequate and should last indefinitely.

Required:

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

a. The annual budgeted costs that are relevant to the decision regarding closing the plant.

b. The annual budgeted costs that are not relevant to the decision regarding closing the plant.

c. Any nonrecurring costs that would arise due to the closing of the plant.

3. Looking at the data you have prepared in (2) above,

a. Calculate the financial advantage (disadvantage) of closing the plant.

b. Should the plant be closed?

In: Accounting

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a...

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 $21.77 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant’s operating costs for the upcoming year was set at $25.07 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.

Denver Cover Plant
Annual Budget for Operating Costs
Materials $ 8,600,000
Labor:
Direct $ 6,100,000
Supervision 410,000
Indirect plant 1,800,000 8,310,000
Overhead:
Depreciation—equipment 1,900,000
Depreciation—building 2,400,000
Pension expense 1,800,000
Plant manager and staff 660,000
Corporate expenses* 1,400,000 8,160,000
Total budgeted costs $ 25,070,000

*Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

Additional facts regarding the plant’s operations are as follows:

  1. 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 sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 30% of the cost of direct materials.
  2. Approximately 320 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. All employees would have difficulty matching Denver Cover’s base pay of $13.20 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 $0.77 million for the year.
  3. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $0.65 million of the annual pension expense would continue whether Denver Cover is open or not.
  4. 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.
  5. If the Denver Cover Plant were closed, the company would realize about $2.58 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. The old equipment is adequate and should last indefinitely.

Required:

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

a. The annual budgeted costs that are relevant to the decision regarding closing the plant.

b. The annual budgeted costs that are not relevant to the decision regarding closing the plant.

c. Any nonrecurring costs that would arise due to the closing of the plant.

3. Looking at the data you have prepared in (2) above,

a. Calculate the financial advantage (disadvantage) of closing the plant.

b. Should the plant be closed?

In: Accounting

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a...

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 $20.75 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant’s operating costs for the upcoming year was set at $24.05 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.

Denver Cover Plant
Annual Budget for Operating Costs
Materials $ 8,600,000
Labor:
Direct $ 6,600,000
Supervision 380,000
Indirect plant 1,500,000 8,480,000
Overhead:
Depreciation—equipment 1,000,000
Depreciation—building 2,600,000
Pension expense 1,800,000
Plant manager and staff 570,000
Corporate expenses* 1,000,000 6,970,000
Total budgeted costs $ 24,050,000

*Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

Additional facts regarding the plant’s operations are as follows:

  1. 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 sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 25% of the cost of direct materials.
  2. Approximately 360 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. All employees would have difficulty matching Denver Cover’s base pay of $11.70 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 $0.84 million for the year.
  3. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $0.62 million of the annual pension expense would continue whether Denver Cover is open or not.
  4. 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.
  5. If the Denver Cover Plant were closed, the company would realize about $2.15 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. The old equipment is adequate and should last indefinitely.

Required:

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

a. The annual budgeted costs that are relevant to the decision regarding closing the plant.

b. The annual budgeted costs that are not relevant to the decision regarding closing the plant.

c. Any nonrecurring costs that would arise due to the closing of the plant.

3. Looking at the data you have prepared in (2) above,

a. Calculate the financial advantage (disadvantage) of closing the plant.

b. Should the plant be closed?

In: Accounting

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a...

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 $23.09 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant’s operating costs for the upcoming year was set at $26.39 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.

Denver Cover Plant
Annual Budget for Operating Costs
Materials $ 9,000,000
Labor:
Direct $ 7,500,000
Supervision 470,000
Indirect plant 1,500,000 9,470,000
Overhead:
Depreciation—equipment 1,800,000
Depreciation—building 2,900,000
Pension expense 1,700,000
Plant manager and staff 520,000
Corporate expenses* 1,000,000 7,920,000
Total budgeted costs $ 26,390,000

*Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

Additional facts regarding the plant’s operations are as follows:

  1. 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 sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 25% of the cost of direct materials.
  2. Approximately 390 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. All employees would have difficulty matching Denver Cover’s base pay of $13.20 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 $0.83 million for the year.
  3. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $0.7 million of the annual pension expense would continue whether Denver Cover is open or not.
  4. 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.
  5. If the Denver Cover Plant were closed, the company would realize about $2.25 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. The old equipment is adequate and should last indefinitely.

Required:

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

a. The annual budgeted costs that are relevant to the decision regarding closing the plant.

b. The annual budgeted costs that are not relevant to the decision regarding closing the plant.

c. Any nonrecurring costs that would arise due to the closing of the plant.

3. Looking at the data you have prepared in (2) above,

a. Calculate the financial advantage (disadvantage) of closing the plant.

b. Should the plant be closed?

In: Accounting

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a...

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 $18.58 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant’s operating costs for the upcoming year was set at $21.88 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.

Denver Cover Plant
Annual Budget for Operating Costs
Materials $ 7,600,000
Labor:
Direct $ 6,400,000
Supervision 430,000
Indirect plant 2,000,000 8,830,000
Overhead:
Depreciation—equipment 1,100,000
Depreciation—building 1,300,000
Pension expense 1,300,000
Plant manager and staff 550,000
Corporate expenses* 1,200,000 5,450,000
Total budgeted costs $ 21,880,000

*Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

Additional facts regarding the plant’s operations are as follows:

  1. 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 sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 25% of the cost of direct materials.
  2. Approximately 340 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. All employees would have difficulty matching Denver Cover’s base pay of $11.80 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 $0.8 million for the year.
  3. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $0.72 million of the annual pension expense would continue whether Denver Cover is open or not.
  4. 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.
  5. If the Denver Cover Plant were closed, the company would realize about $1.9 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. The old equipment is adequate and should last indefinitely.

Required:

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

a. The annual budgeted costs that are relevant to the decision regarding closing the plant.

b. The annual budgeted costs that are not relevant to the decision regarding closing the plant.

c. Any nonrecurring costs that would arise due to the closing of the plant.

3. Looking at the data you have prepared in (2) above,

a. Calculate the financial advantage (disadvantage) of closing the plant.

b. Should the plant be closed?

In: Accounting

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a...

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 $21.2 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant’s operating costs for the upcoming year was set at $24.5 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.

Denver Cover Plant
Annual Budget for Operating Costs
Materials $ 7,600,000
Labor:
Direct $ 7,500,000
Supervision 420,000
Indirect plant 1,700,000 9,620,000
Overhead:
Depreciation—equipment 1,600,000
Depreciation—building 2,200,000
Pension expense 1,600,000
Plant manager and staff 580,000
Corporate expenses* 1,300,000 7,280,000
Total budgeted costs $ 24,500,000

*Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

Additional facts regarding the plant’s operations are as follows:

  1. 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 sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 25% of the cost of direct materials.
  2. Approximately 330 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. All employees would have difficulty matching Denver Cover’s base pay of $12.80 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 $0.72 million for the year.
  3. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $0.69 million of the annual pension expense would continue whether Denver Cover is open or not.
  4. 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.
  5. If the Denver Cover Plant were closed, the company would realize about $1.9 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. The old equipment is adequate and should last indefinitely.

Required:

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

a. The annual budgeted costs that are relevant to the decision regarding closing the plant.

b. The annual budgeted costs that are not relevant to the decision regarding closing the plant.

c. Any nonrecurring costs that would arise due to the closing of the plant.

3. Looking at the data you have prepared in (2) above,

a. Calculate the financial advantage (disadvantage) of closing the plant.

b. Should the plant be closed?

In: Accounting

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a...

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 $21.66 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant’s operating costs for the upcoming year was set at $24.96 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.

Denver Cover Plant
Annual Budget for Operating Costs
Materials $ 8,600,000
Labor:
Direct $ 7,400,000
Supervision 460,000
Indirect plant 2,000,000 9,860,000
Overhead:
Depreciation—equipment 1,300,000
Depreciation—building 1,500,000
Pension expense 1,600,000
Plant manager and staff 600,000
Corporate expenses* 1,500,000 6,500,000
Total budgeted costs $ 24,960,000

*Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

Additional facts regarding the plant’s operations are as follows:

  1. 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 sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 25% of the cost of direct materials.
  2. Approximately 360 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. All employees would have difficulty matching Denver Cover’s base pay of $12.90 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 $0.86 million for the year.
  3. Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $0.79 million of the annual pension expense would continue whether Denver Cover is open or not.
  4. 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.
  5. If the Denver Cover Plant were closed, the company would realize about $2.15 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. The old equipment is adequate and should last indefinitely.

Required:

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

a. The annual budgeted costs that are relevant to the decision regarding closing the plant.

b. The annual budgeted costs that are not relevant to the decision regarding closing the plant.

c. Any nonrecurring costs that would arise due to the closing of the plant.

3. Looking at the data you have prepared in (2) above,

a. Calculate the financial advantage (disadvantage) of closing the plant.

b. Should the plant be closed?

In: Accounting

How much should I save at the beginning of every month for retirement? I want to...

How much should I save at the beginning of every month for retirement? I want to provide myself with increasing income starting at age 60 lasting to age 95, replacing 100% of my current income.

Assumptions:

Current age 30

Inflation 2.5%

Projected return before retirement 8%

Projected return after retirement 6%

Current income $50,000

Estimated Social Security $20,000

Wage Replacement Ratio 100%

Current Retirement Accounts $10,000

In: Finance