Make vs. Buy; Strategy GianAuto Corporation manufactures parts and components for manufacturers and suppliers of parts for automobiles, vans, and trucks. Sales have increased each year based,in part, on the company’s excellent record of customer service and reliability. The industry as a wholehas also grown as auto manufacturers continue to outsource more of their production, especially tocost-efficient manufacturers such as GianAuto. To take advantage of lower wage rates and favorablebusiness environments around the world, GianAuto has located its plants in six different countries.Among the various GianAuto plants is the Denver Cover Plant, one of GianAuto’s earliest plants.The Denver Cover Plant prepares and sews coverings made primarily of leather and upholsteryfabric and ships them to other GianAuto plants, where they are used to cover seats, headrests, doorpanels, and other GianAuto products.Ted Vosilo is the plant manager for the Denver Cover Plant, which was the first GianAuto plantin the region. As other area plants were opened, Ted was given the responsibility for managing themin recognition of his management ability. He functions as a regional manager, although the budgetfor him and his staff is charged to the Denver Cover Plant.Ted has just received a report indicating that GianAuto could purchase the entire annual outputof Denver Cover from suppliers in other countries for $50 million. He was astonished at the lowoutside price because the budget for Denver Cover Plant’s operating costs for the coming year wasset at $82 million. He believes that GianAuto will have to close operations at Denver Cover torealize the $32 million in annual cost savings.Denver Cover’s budget for operating costs for the coming year follows:[LO 11-7][LO 11-8][LO 11-3, 11-5, 11-8]DENVER COVER PLANTBudget for Operating Costsfor the Year Ending December 31, 2019(000s omitted)Direct materials $32,000LaborDirect $23,000Supervision 3,000Indirect plant 4,000 30,000Other overheadDepreciation—equipment $ 5,000Depreciation—building 3,000Pension expense 4,000Plant manager and staff 2,000Corporate allocation 6,000 20,000Total budgeted costs $82,000Additional facts regarding the plant’s operations are as follows:• Due to Denver Cover’s commitment to use high-quality fabrics in all its products, the purchasing department placed blanket purchase orders with major suppliers to ensure the receipt ofFinal PDF to printerblo17029_ch11_411-459.indd 454 02/19/18 09:08 AM454 Part Two Planning and Decision Makingsufficient materials for the coming year. If these orders are canceled as a result of the plantclosing, termination charges would amount to 15% of the cost of direct materials.• Approximately 400 plant employees will lose their jobs if the plant is closed. This includes alldirect laborers and supervisors as well as the plumbers, electricians, and other skilled workersclassified as indirect plant workers. Some would be able to find new jobs, but many would havedifficulty doing so. All employees would have difficulty matching Denver Cover’s base pay of$14.40 per hour, the highest in the area. A clause in Denver Cover’s contract with the unioncould help some employees; the company must provide employment assistance to its formeremployees for 12 months after a plant closing. The estimated cost to administer this service is$1 million for the year.• Some employees would probably elect early retirement because GianAuto has an excellent plan.In fact, $3 million of the 2019 pension expense would continue even if Denver Cover wereclosed.• Ted and his staff would not be affected by closing Denver Cover. They would still be responsiblefor managing three other area plants.• Denver Cover considers equipment depreciation to be a variable cost and therefore uses the unitsof-production method to depreciate its equipment. The company uses the straight-line method todepreciate its building.Required1. Explain GianAuto’s competitive strategy and how this strategy should be considered with regard to theDenver Cover Plant decision. Identify the key strategic factors that should be considered in the decision.2. GianAuto Corporation wants you to prepare an analysis of whether to close the Denver Cover Plant.Specifically, what is the estimated year 1 cost savings associated with closing the plant (i.e., purchasingfrom an external supplier)? State your answer in thousands (000s), with the final answer rounded to thenearest thousand. 3. Supplement the financial analysis in requirement 2 with a consideration of global competition andGianAuto’s competitive strategy