Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Chapter 17, Problem 30P

KarlAuto Corporation manufactures automobiles, vans, and trucks. Among the various KarlAuto plants around the United States is the Bloomington plant, where vinyl covers and upholstery fabric are sewn. These are used to cover interior seating and other surfaces of KarlAuto products.

Pam Teegin is the plant manager for the Bloomington cover plant—the first KarlAuto plant in the region. As other area plants were opened, Teegin, in recognition of her management ability, was given the responsibility to manage them. Teegin functions as a regional manager, although the budget for her and her staff is charged to the Bloomington plant.

Teegin has just received a report indicating that KarlAuto could purchase the entire annual output of the Bloomington cover plant from outside suppliers for $32 million. Teegin was astonished at the low outside price, because the budget for the Bloomington plant’s operating costs was set at $56.45 million. Teegin believes that the Bloomington plant will have to close down operations in order to realize the $24.45 million in annual cost savings.

The budget (in thousands) for the Bloomington plant’s operating costs for the coming year follows:

Chapter 17, Problem 30P, KarlAuto Corporation manufactures automobiles, vans, and trucks. Among the various KarlAuto plants

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

Due to the Bloomington plant’s commitment to use high-quality fabrics in all of its products, the Purchasing Department was instructed to place blanket 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 18 percent of the cost of direct materials.

Approximately 600 plant employees will lose their jobs if the plant is closed. This includes all 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, but many others would have difficulty. All employees would have difficulty matching the Bloomington plant’s base pay of $29.40 per hour, the highest in the area. A clause in the Bloomington plant’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 million for the year.

Some employees would probably elect early retirement because the company has an excellent pension plan. In fact, $4.6 million of next year’s pension expense would continue whether or not the plant is open.

Teegin and her staff would not be affected by the closing of the Bloomington plant. They would still be responsible for administering three other area plants.

Equipment depreciation for the plant is considered to be a variable cost and the units-of-production method is used to depreciate equipment; the Bloomington plant is the only KarlAuto plant to use this depreciation method. However, it uses the customary straight-line method to depreciate its building.

Required:

  1. 1. Prepare a quantitative analysis to help in deciding whether or not to close the Bloomington plant. Explain how you treated the nonrecurring relevant costs.
  2. 2. Consider the analysis in Requirement 1, and add to it the qualitative factors that you believe are important to the decision. What is your decision? Would you close the plant? Explain. (CMA adapted)
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Chapter 17 Solutions

Cornerstones of Cost Management (Cornerstones Series)

Ch. 17 - Prob. 12DQCh. 17 - Prob. 13DQCh. 17 - Prob. 14DQCh. 17 - Why would a firm ever offer a price on a product...Ch. 17 - Each year, Basu Company produces 18,000 units of a...Ch. 17 - Reshier Company makes three types of rug...Ch. 17 - Sequoia Paper Products, Inc., manufactures boxed...Ch. 17 - Betram Chemicals Company processes a number of...Ch. 17 - Prob. 5ECh. 17 - Elliott, Inc., has four salaried clerks to process...Ch. 17 - Prob. 7ECh. 17 - Feinan Sports, Inc., manufactures sporting...Ch. 17 - Wehner Company is currently manufacturing Part...Ch. 17 - Brees, Inc., a manufacturer of golf carts, has...Ch. 17 - Prob. 11ECh. 17 - Nutterco, Inc., produces two types of nut butter:...Ch. 17 - Carleigh, Inc., is a pork processor. Its plants,...Ch. 17 - Global Reach, Inc., is considering opening a new...Ch. 17 - Tony and Tina Roselli own and run TNTs Pizza...Ch. 17 - Jason Rogers works full-time for UPS and runs a...Ch. 17 - Prob. 17ECh. 17 - A company is considering a special order for 1,000...Ch. 17 - Walloon Company produced 150 defective units last...Ch. 17 - Pasha Company produced 50 defective units last...Ch. 17 - Future costs that differ across alternatives are:...Ch. 17 - Thaler Company bought 26,000 of raw materials a...Ch. 17 - Norton Products, Inc., manufactures...Ch. 17 - Prob. 24PCh. 17 - Fiorello Company manufactures two types of...Ch. 17 - St. Johns Medical Center (SJMC) has five medical...Ch. 17 - Brandy Dees recently bought Nievo Enterprises, a...Ch. 17 - Apollonia Dental Services is part of an HMO that...Ch. 17 - Pharmaco Corporation buys three chemicals that are...Ch. 17 - KarlAuto Corporation manufactures automobiles,...Ch. 17 - Morrill Company produces two different types of...Ch. 17 - Paladin Company manufactures plain-paper fax...
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