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Scenario: TerraLuna Corporation manufactures seats for various recreational vehicles (automobiles, vans, trucks, etc.). The company has plants around the world, including the Denver plant, which manufactures seat covers. Carlena Minor currently serves as the regional production manager for the company and spends the majority of her time at the Denver plant as the plant manager. Her budget as the regional manager is charged to the Denver plant. Carlena has just been informed by the corporate office that TerraLuna has received a competitive bid from an outside supplier. The supplier has offered to provide the equivalent of the entire annual output of the Denver plant for a total of $35 million per year. This number sounds shockingly low to Carlena who just finished reviewing the operating budget for the Denver plant and reported total budgeted costs of $52 million for the upcoming year. If corporate executives accept the outside bid, the Denver plant will be closed down. The budget for the Denver plants upcoming year is shown on the next page. Carlenas primary concern is for the plant employees. Approximately 400 employees will lose their jobs if the plant is closed, including all of the direct laborers, supervisors, and indirect laborers (plumbers, electricians, and other skilled workers). Some would be able to find new jobs, but others would face difficulty in the current downturn job market. This is especially the case because TerraLuna currently offers a base pay of $18.80 per hour, the highest in the area. The Denver plant is unionized and a clause in the union contract may help some employeesthe company is required to provide employment assistance to its former employees for 12 months after the plant closes. This would equate to approximately $1.5 million for the year. Other employees would have the option to choose early retirement and take advantage of TerraLunas excellent pension plan. Currently $3 million of the annual pension expense would continue regardless of the Denver plant closing or remaining operational. Carlena and her staff would not be affected by the plant closing because they would still be responsible for supervising three other area plantsone in Colorado Springs, one in Boulder, and one in Fort Collins. The factory equipment from the Denver plant could be moved and put to use in one of the other regional facilities. Management has also considered plans to put the Denver building to use as a storage facility or a distribution center for the region. If the plant were to remain open, there were no plans to make any significant investments in new equipment or buildings. The old equipment has been well-maintained and serviced regularly, so it should last indefinitely under the same treatment. Lastly, the Denver plant has remained committed to the use of high-quality fabrics in all of its products. For this reason, the Purchasing Department was instructed to make use of blanket purchase orders with major suppliers to ensure the receipt of enough materials for the coming year. If these orders are cancelled because of the plant closing, termination charges would amount to 20% of direct materials

1. Without regard to plant costs or benefits to employees, identify the advantages of keeping the plant open. How might you convince the executives of TerraLuna Corporation to keep production in-house?

Use the following information for Questions 2 4. TerraLuna plans to prepare a financial analysis that will be used when deciding to keep or close the Denver plant. For each of the objectives required, calculate the total dollar amount.

The current operating expense budget has been provided below

Direct Materials 14,000,000.00

Labor:

Direct labor 13,100,000

Supervision labor 900,000

Indirect plant labor 4,000,000

total labor: 18,000,000

overhead

general equipemnt deprecation 3,200,000

general building depreciation 7,000,000

pension expense 5,000,000

plant manager and staff 800,000

corporate expense 4,000,000

total overhead 20,000,000

total budgeted costs 52,000,000

2. Identify the total annual budgeted costs that are relevant to the decision regarding closing the plant

3. Identify the total annual budgeted costs that are irrelevant to the decision regarding closing the plant and explain why they are irrelevant.

4. Identify the total of any non-recurring costs (one-time charges) that would arise from the closing of the plant and explain how they might affect managements decision.

5. Given the data you have prepared in the questions 2 - 4, what is the financial advantage or disadvantage of closing the plant? Be sure to include in your calculations the current year cost of closing the plant and the cost to the company in future years. Explain your answer

6. Identify any potential revenues, benefits, or costs not specifically mentioned in the problem that TerraLuna should consider before making a decision

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