Victoria Chemicals (B) Group Case Study
Victoria Chemicals’ Intermediate Chemicals Group (ICG) is evaluating two mutually exclusive proposals on their capital expenditures. The Liverpool and Rotterdam plants have compiled separate proposals. Each proposal had the potential to increase the polypropylene output by 7 percent for their plant respectively. Victoria Chemicals could not view a 14 percent increase companywide being feasible, but agreed half of it would. The board would approve only one of the projects. James Fawn must support one proposal and then submit it to the board for consent.
Background of Firm
Victoria Chemicals, a major competitor in the worldwide chemicals industry, is a leading producer of polypropylene, which is a polymer known for its strength and malleability. Merseyside is where the production of polypropylene pellets begins. These pellets are refined gas received in tank cars known as propylene. In the first stage of the production process, polymerization, the propylene gas was combined with diluents in a large pressure vessel. The second stage produces a finished plastic which is extruded into pellets for shipment to the customer.
There are two plants that produce polypropylene for Victoria Chemicals. The two plants are located in Liverpool, England, and Rotterdam, Holland. The plants were built in 1967 and are identical in scale and design. These two plants supply Victoria Chemicals’ European and Middle Eastern customers. It has been estimated that there are seven major competitors of Victoria Chemicals in its market region (Exhibit 1) and numerous small producers. Statement of Situation
Lucy Morris, the new plant manager, found that the previous plant manager limited capital expenditures to necessary maintenance and that routine maintenance had been delayed to the point that it was now necessary. She has found that there are numerous opportunities for improvement including refurbishing the plant and the equipment used in the polymerization project. These improvements would save energy and improve the process flow, decreasing costs and increasing output.
Lucy Morris presented a project that would help relieve some of the operating problems at Merseyside. The project she presented would involve an expenditure of GBP12 million. The plant would have to be shut down for 45 days in order for this project to be successful. This temporary shutdown may cause Victoria Chemicals to lose customers because they will have to receive the product from their competitors. Greystock, who is Victoria Chemicals’ controller, believes this would only be temporary and the customers would all return to Victoria Chemicals after the Merseyside project’s completion.
Accepting the project would give the company a variety of different financial benefits. Gross margin is expected to increase from 11.5 percent to 12.5 percent. Manufacturing throughput will increase by 7 percent. Greystock assumed that the increase in product at Merseyside will be sold. He is highly confident that the efficiencies that were estimated will be realized.
The transport division, a cost center, will be affected by the increase in throughput, Transport would have to increase its allocation of tank cars to Merseyside. The costs generated for these cars would cost GBP2 million and have a depreciable life of 10 years, but with proper maintenance, the cars could operate much longer. The cars could only be used in that division due to them being incompatible elsewhere.
Elizabeth Eustace presented a 90 page proposal that would help improve the operating efficiencies at Rotterdam. This proposal called for the expenditure of GBP10.5 million over 3 years. Elizabeth’s proposal was to revolutionize the Rotterdam plant with high-tech procedures. The project’s core is a new computer accompanied by new software that was established in Japan. The method was proven in...