Course: Contract and Liquid Chemical Co.

The Cost Analysis for Decision Making project is intend to be a comprehensive evaluation of the key objectives cover passim this bod. It leaveing ch all toldenge you to apply your knowledge of live information when evaluating the ratiocination to make or buy a product. Please use this specify and grading rubric as a guide to completing your course project. It tolerates specific details of the take elements of the project, and it result be used by your instructor as a grading guide. Read Integrative deterrent example 4-61, Make versus Buy, on pages 151 and 152 of the course text.As agreee that you are the command manager (Mr. Walsh) confront with this decision. You have identified the following 4 alternatives available to Liquid chemic Co. substitute(a) A It is the status quo. (i. e. , Liquid chemical Co. will relate making the containers and performing support. ) Alternative B Liquid Chemical Co. will continue making the containers, except it will emergesource the maintenance to Packages, Inc. Alternative C Liquid Chemical Co. will buy containers from Packages, Inc. , and it will perform the maintenance. Alternative D It is completely outsourced. Packages, Inc. will make the containers and provide the necessary maintenance. Your project should include the following items Part (a) Discuss to each one of the four alternatives outlined above. Identify the relevant cost (including amounts) for each of the four alternatives, and explain why these costs are relevant to the decision. Identify all costs that are non relevant, and explain why they are not relevant. What are the advantages and disadvantages of each alternative? Who benefits and who loses? Part (b) Other than the relevant costs identified in Part (a), what additional information would you use when making your decision? Are there financial factors other than those identified in the case study that you would incorporate into your decision? What nonfinancial information would touch on your decision? Part (c) As the general manager, which alternative would you choose, and why? backing your conclusion with facts and prototypes, as necessary. The Liquid Chemical Comp any(prenominal) manufactures and sells a surf of high-grade products. Many of these products require careful packaging.The company has a peculiar(prenominal) patented lining made that it uses in finickyly designed wadding containers. The lining uses a special material known as GHL. The hearty operates a department that maintains and repairs its packing containers to keep them in keen school and that builds new ones to replace units that are damaged beyond repair. Mr. Walsh, the general manager, has for or so time suspected that the profligate might turn in money and liquidate equally good service by buying its containers from an outside source. by and by careful inquiries, he has approached a firm specializing in container production, Packages, Inc. and asked for a quotation. At the same time, he asked Mr. Dyer, his chief accountant, to let him have an up-to-date educational activity of the costs of operating the container department. Within a few days, the quotation from Packages, Inc. , arrived. The firm proposed to supply all the new containers requiredat that time, running at the rate of 3,000 per yearfor $1,250,000 a year, the hale to run for a guaranteed experimental condition of five years and thereafter renewable from year to year. If the number of containers required increased, the contract price would increase proportionally.Packages, Inc. , also proposed to perform all maintenance and repair attain on existing packaging containers for a sum of $375,000 a year, on the same contract terms. Mr. Walsh compared these figures with Mr. Dyers cost figures, which covered a years operations of the container department of the Liquid Chemical Company and appear in Exhibit 4. 13. Walsh concluded that he should right off close the packing container department and sign the contracts offered by Packages, Inc. He felt up an obligation, however, to give the manager of the department, Mr.Duffy, an opportunity to question his decision before acting. Walsh told Duffy that Duffys own position was not in jeopardy. Even if Walsh unlikeable his department, another(prenominal) managerial position was becoming vacant to which Duffy could move without any passing play of pay or prospects. The manager Duffy would replace also earned $80,000 per year. Moreover, Walsh knew that he was paying $85,000 per year in rent for a warehouse a couple of miles away that was used for other corporate purposes. If he closed Duffys department, hed have all the warehouse space he haveed without renting additional space.Duffy gave Walsh a number of considerations to estimate about before he closed the department For instance, he said, what will you do with the machinery? It cost $1,200,000 four years ago, but youd be lucky if youd get $200,000 for it now, even though i ts good for another five years. And then theres the stock of GHL (a special chemical) we bought a year ago. That cost us $1,000,000, and at the rate were using it now, itll last another four years. We used up completely about one-fifth of it last year. Dyers figure of $700,000 for materials includes $200,000 for GHL.But itll be tricky stuff to handle if we gaint use it up. We bought it for $5,000 a ton, and you couldnt buy it today for less than $6,000. But youd get hardly $4,000 a ton if you sold it, after youd covered all the handling expenses. Walsh also worried about the workers if he closed the department. I dont think we can find room for any of them elsewhere in the firm. However, I believe Packages would take all but Hines and Walters. Hines and Walters have been with us since they left school 40 years ago. Id feel bound to give them a supplemental bounty$15,000 a year each for five years, say.Also, Id figure a total severance pay of $20,000 for the other employees, pa id in a lump sum at the time we sign the contract with Packages. Duffy showed some relief at this. But I still dont like Dyers figures, he said. What about this $225,000 for general administrative overheads? You surely dont expect to sack anyone in the general office if Im closed, do you? Walsh agreed. Well, I think weve thrashed this out pretty well, said Walsh, but Ive been turning over in my mind the possibility of perhaps keeping on the maintenance work ourselves. What are your views on that, Duffy? I dont know, said Duffy, but its worth looking into. We wouldnt need any machinery for that, and I could hand the supervision over to the current supervisor who earns $50,000 per year. Youd need only about one-fifth of the workers, but you could keep on the oldest and save the pension costs. Youd still have the $20,000 severance pay, I suppose. You wouldnt save any space, so I suppose the rent would be the same. I dont think the other expenses would be much than $65,000 a year. W hat about materials? asked Walsh. We use 10 percent of the total on maintenance, Duffy replied. Well, Ive told Packages that Id give them my decision within a week, said Walsh. Ill let you know what I decide to do before I write to them. Assume the company has a cost of capital of 10 percent per year and uses an income evaluate rate of 40 percent for decisions such as these. Liquid Chemical would pay taxes on any gain or loss on the sale of machinery or the GHL at 40 percent. (Depreciation for book and tax purposes is straight-line over eight years. ) The tax basis of the machinery is $600,000. Also assume the company had a five-year time scene for this project and that any GHL needed for course of study 5 would be purchased during Year 5.