Assume that you are the general manager (Mr. Walsh) faced with this decision. Yo
ID: 2458453 • Letter: A
Question
Assume that you are the general manager (Mr. Walsh) faced with this decision. You have identified the following four alternatives available to Liquid Chemical Co.
Alternative A: It is the status quo. (i.e., Liquid Chemical Co. will continue making the containers and performing maintenance.)
Alternative B: Liquid Chemical Co. will continue making the containers, but it will outsource the maintenance to Packages, Inc.
Alternative C: Liquid Chemical Co. will buy containers from Packages, Inc., but 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 each of the four alternatives outlined above. Identify the relevant costs (including amounts) for each of the four alternatives, and explain why these costs are relevant to the decision. Identify any costs that are not 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 affect your decision?
Part (c): As the general manager, which alternative would you choose, and why? Support your conclusion with facts and figures, as necessary.
Materials $700,000
Labor
Supervisor 50,000
Workers 450,000
Department overheads
Managers salary $80,000
Rent on container department 45,000
Depreciation on machinery 150,000
Maintenance of machinery 36,000
Other expenses 157,500
Total 468,500
$1,668,500
Proportion of general administrative overheads 225,000
Total cost of department for the year 1,893,500
Explanation / Answer
Relevant cost: Alternative A B C D Material 700,000 700,000 - - Labor: - Supervisor 50,000 50,000 - - Workers 450,000 450,000 - - Department Overheads: - Managers salary 80,000 80,000 - - rent on container department 45,000 45,000 - - depreciation on machinery 150,000 150,000 150,000 150,000 maintenance on machinery 36,000 - 36,000 - other expenses 157,500 157,500 157,500 - Total overheads 468,500 432,500 343,500 - 1,668,500 1,632,500 343,500 - Proportion of general administrative overheads 225,000 225,000 225,000 225,000 Total cost 1,893,500 1,857,500 568,500 - Proportion of general administrative overheads is irrelevant as it is allocated expenses and is common to all the alterenatives Other cost are relevant cost Material and Labor cost is incurred under alternative A and B because the production is retained by the company. Depreciation is common to all considering the fact that machinery is already purchased. the amount Package Inc would charge would be required to take a decision on which is the best alternative.