Analysis of Case Liquid Chemical Company Include a Brief Summary of Case Study ..

Questions and Problems for Consideration 1. Given the t o alternatives do the or! inside or subcontract it to Pac!a"es Ltd# $. %hat are the advanta"es of one alternative over the other# &. %hich action ould you favor# 1. Given the t o alternatives do the or! inside or subcontract it to Pac!a"es Ltd.# Two alternatives for Liquid Chemical Company to decide are keeping the container department of its company and signing the contract with Packages, Ltd. ith helping alsh to make an efficient decision, we!ll try to eliminate all sunk costs and costs that don!t differ "etween alternatives.
Cost of Operating the Container Dept. Labor Rent: Plant Rent: Wareho !e "ther e#$en!e! Part o% & '( *otal $100,000 90,000 170,000 15,000 )5,000 $++9,000 Cost of Contract with Packages. Ltd. Contract--New Contr.--Maint. $250,000 75,000

*otal

$+25,000

The total difference "etween keeping the container department and signing the contract with Package Ltd. will "e #$%,&&&. 'ince the contract will "e four years contract, "y multiply % to #$%,&&& is #(),&&&. *t means if Liquid Chemical Company signs the contract with Packing Ltd., it can save #(),&&& for four years. Therefore, we think the work should su"contract to Packages Ltd. $. %hat are the advanta"es of one alternative over the other# The advantages of subcontracting are as follows: +There is a direct saving of ,-.,-&& / ,0(,&&& 1 #(,,-&& +The company does not need to rent out the e2tra warehouse space which will "ring a savings of #$-,&&& of rent. The advantages of not subcontracting are. +'avings on machinery

0%&,&&&3. 1 ,&,&&& per year, usage for % years. 'o, $0&,&&& / salvage money %&,&&& 1 #.&,&&& loss on machinery averted. +'avings on special chemical4 0&&,&&& / %&,&&&5used6 1 $)&,&&&4 0&7 loss on sales that is #,0,&&& loss on sales and #,0,&&& opportunity cost. +The use of general administrative overheads. #%(,&&& will continue to "e incurred "ecause the personnel will continue with the company. The cost analysis of the proposed maintenance contract4 $3( men 0&,&&& $&7 materials %,&&& 8ent 5same6 9,&&& :2penses $,.&&& Total %),&&& $3( of ;AA taken on direct la"or "asis1 9,&&& Total cost of maintenance #((,&&& 'ince the su"contracting quotation for maintenance is #-(,&&& there is a savings of #0&,&&&. 3. Which action would you favor? The loss encountered from the sales of machinery, the loss on the sales of chemicals and the fact that the maintenance contracts is offsetting the cost of rented space would led us to favor in continuing with the self+ manufacturing. <rom the case study, it is o"vious that the company will conduct the maintenance =o" "y itself as well as continuing with the rented space. 'o, it is via"le to go in for self manufacturing. *n addition, many workers who have "een with the company for a long time will not have to "e laid off and they may continue with the company. The internal ad=ustment of employees also gets averted in the "argain.