Gianauto

Decision: GianAuto

ACCT 5xx

Based on the Incremental Cost Analysis, we recommend that GianAuto keep open the doors of Denver Cover.

According to our analysis, if GianAuto discontinues plant operations, they will incur an incremental cost of $2,800,000 in 2004 but realize an incremental revenue of $700,000 in 2005. Despite the incremental revenue forecast in 2005, a closure of the plant will result in incremental costs of $1,830,000 in 2006. This forecast is dependent on our Sales, Materials, Supply and Depreciation Assumptions (see below). In sum, if GianAuto continues plant operations, it will recognize a significant cost savings every year after 2005.

Sales, Materials, Supply, and Depreciation Assumptions: The following are assumptions that have significant impact on our recommendation.

* 10% Increase Assumption

GianAuto's sales have increased 10% each year and they are confident that this sales growth will continue. Consequently, materials and supply costs will increase by 10%, as will any unit-based depreciation for equipment.

* Depreciation Assumption

Up to this point, the company has chosen to use the units-of-production method for equipment depreciation. If GianAuto discontinues operations but does not sell or absorb the equipment into other operations, they must depreciate the equipment using the straight-line depreciation method since no units are being produced. We estimate the amount of equipment depreciation based on our understanding that the units-of-production and straight-line methods typically produce similar depreciation results. In 2004, this cost was $5,000,000 under units-of-production and therefore will be $5,000,000 under straight-line for the remaining life span of that equipment. If GianAuto keeps the plant open, unit-based depreciation costs will increase roughly 10% every year, due to proportionately increasing sales. Depreciation Costs on Equipment will be: (in thousands)

Continue to Operate Close Doors Difference in Cost

(Associated