GianAuto Corporation Plant Closing/Outsourcing Decision
Denver Cover Plant Closing Analysis Reference: Module 16
1. GianAuto Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Denver Cover Plant and outsource. For this purpose, identify:
In order to appropriately analyze the financials to determine whether to outsource or keep operations in house, we need to focus on the relevance of each line item of the existing operating budget for the Denver plant as well as the proposed costs for the outsourcing engagement.
• The annual budgeted costs that are relevant to the decision regarding closing the plant, and briefly explain why each is relevant (list and show dollar amounts).
• The relevant budget costs to evaluate would be the existing material and labor costs as well as the outsourcing costs.
• The annual budgeted costs that are not relevant to the decision regarding closing the plant, and explain why each is not relevant (list and show dollar amounts).
• The fixed annual pension costs for the associates at the plant are estimated at $3Million annually. This cost would exist independently of the plant being open or outsourced, therefore, it is not relevant to the decision to close the plant.
• Regardless of the decision to outsource or provide these services in house, the plant manager and his direct staff will remain active positions to manage the outsourcing agreement as well as the other 3 plants, therefore their annual overhead expenses will remain at $800,000.
• Corporate Allocation of $4 Million would be incurred regardless of the decision to continue operations internally or outsourced, therefore there would be no impact to this decision.
• The Depreciation of the building would continue until exhausted which in the analysis the assumption would be that it would continue at $7Million per year for four years and be reduced to $2Million the 5th year....