EXPO Appliance Corporation manufactures a variety of kitchen appliances with operations in multiple cities across North America. One of the largest manufacturing facilities in Toronto, Ontario specializes in the production of Microwaves. Edmond Ericcson is the operations manager of the Toronto manufacturing facility and is in charge of all items related to this operation. Edmonton recently found out that EXPO received an offer from another company to provide the entire volume of microwaves that the Toronto plant typically produces for a total of $29 million per year. Edmonton was surprised at how low this offer was, considering the budget for the Toronto plant to produce these microwaves was $34.8 million for the coming year. If EXPO accepts this offer to buy the microwaves from an external company, they will no longer require the Toronto production facility and it will be shut down.
The annual budget for the Toronto facility’s operating costs for the coming year:
*Expense for Edmond and his regional staff.
**Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.
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Classification: Internal
Classification: Internal
Additional facts regarding the facility’s operations are as follows:
a. Due to the plant’s commitment to use high-quality fabrics in all 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 cancelled because of the plant closing, termination charges would amount to 23% of the cost of direct materials.
b. Approximately 350 employees will lose their jobs if the plant is closed. This includes all the direct labourers and supervisors, management and staff, and the plumbers, electricians, and other skilled workers classified as indirect plant workers. Some of these workers would have difficulty finding new jobs. Nearly all the production workers would have difficulty matching the plant’s base pay of $12.50 per hour, which is the highest in the area. A clause in the plant’s contract with the union may help some employees; the company must provide employment assistance and job training to its former employees for 12 months after a plant closing. The estimated cost to administer this service would be $1 million.
c. Some employees would probably choose early retirement because EXPO has an excellent pension plan. In fact, $1.1 million of the annual pension expenditures would continue whether the plant is open or not.
d. Edmond and his regional staff would not be affected by the closing of the Toronto plant. They would still be responsible for running three other plants.
e. If the plant were closed, the company would realize about $3 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.
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Required:
Prepare a Memo for EXPO’s Management explaining to them whether the plant should be closed. Use a combination of financial and non-financial considerations in your response.