Liquid Chemical Company Case Study

Topics: Costs, Opportunity cost, Cash flow Pages: 9 (2422 words) Published: July 30, 2006
Liquid Chemical Company

Executive Summary

Identifying all of the information relevant to a particular business decision is a challenging task because relevance is a broad concept. The process requires an understanding of quantitative and qualitative information, a grasp of legal issues, sensitivity to ethical concerns and an ability to discern fact from decision.

Virtually all business decisions involve choosing among alternative courses of action. The only information relevant to a decision is that which varies among the possible courses of action being considered. Costs, revenues, and other factors that do not vary among possible courses of action are not relevant to the decision.

In addition to quantitative information, many non-financial factors must be taken into consideration. It would be irresponsible and short- sighted for managers to seek solutions and base decisions entirely on revenue and cost figures. Most business decisions also require an examination of legal issues, sensitivity to ethical implications, and an ability to distinguish fact from opinion. Thus, while incremental analysis is an excellent tool for evaluating alternative courses of action, managers should not automatically follow the first course of action that holds a promise of increased profitability. Rather, they should always be alert to the possibility that a more satisfactory, and perhaps more creative, solution exists.

Case Context

- Liquid Chemical Company manufactured and sold a range of high- grade products throughout Great Britain.

- They had a special patented lining, made from a material known as GHL, and the firm operated a department especially to maintain its containers in good condition and to make new ones to replace those that were beyond repair.

- Dale Walsh, the general manager, had suspected for some time that the firm might save money and get equally good service by buying its containers from Packages, Ltd.

- Packages, Ltd. was prepared to supply all the new containers required- at the time running at the rate of 3,000 a year- for �0,000 a year.

Problem Definition

1. Should Dale Walsh accept the quotation from Packages, Ltd? Would it be a sound decision?

2. What addition information is required/ necessary in order to assure win- win situation?

Framework for Analysis

- Irrespective of whether the contract was entered into or not, Packages, Ltd., would undertake to carry out purely maintenance work on containers, short of replacement, for a sum of $90,000 a year.

- the machine costs �0,000 four years ago and will be good in the next five years of so.

- the remaining stock of GHL costs �5,000 and will last in the next four years or so.

- the company is paying �,840 a year in rent for warehouse; if the packaging department would be closed, its existing building would be used as storage space.



Strategy - continue in-house for five years 牋牋牋牋 牋牋牋牋 牋牋牋牋 牋牋牋牋 牋牋牋牋 牋牋牋牋Five Year

In pounds sterling 牋牋牋牋Year 1 牋牋牋牋Year 2 牋牋牋牋Year 3 牋牋牋牋Year 4 牋牋牋牋Year 5 牋牋牋牋Total

Expenses: 牋牋牋牋 牋牋牋牋 牋牋牋牋 牋牋牋牋 牋牋牋牋 牋牋牋牋

牋牋牋牋GHL 牋牋牋牋51,000 牋牋牋牋51,000 牋牋牋牋51,000 牋牋牋牋51,000 牋牋牋牋58,000 牋牋牋牋262,000

牋牋牋牋Other Material (one quarter year on hand) 牋牋牋牋127,360 牋牋牋牋127,360 牋牋牋牋127,360 牋牋牋牋127,360 牋牋牋牋127,360 牋牋牋牋636,800

牋牋牋牋Direct labor 牋牋牋牋126,000 牋牋牋牋126,000 牋牋牋牋126,000 牋牋牋牋126,000 牋牋牋牋126,000 牋牋牋牋630,000

牋牋牋牋Department manager (Duffy paid anyway) 牋牋牋牋0 牋牋牋牋0 牋牋牋牋0 牋牋牋牋0 牋牋牋牋0 牋牋牋牋0

牋牋牋牋Hiring another manager (Duffy's opportunity cost) 牋牋牋牋20,300 牋牋牋牋20,300 牋牋牋牋20,300 牋牋牋牋20,300 牋牋牋牋20,300 牋牋牋牋101,500

牋牋牋牋Rent (opportunity cost) 牋牋牋牋21,840 牋牋牋牋21,840 牋牋牋牋21,840 牋牋牋牋21,840 牋牋牋牋21,840 牋牋牋牋109,200

牋牋牋牋Depreciation (same as for tax accounting) 牋牋牋牋38,220 牋牋牋牋38,220 牋牋牋牋38,220 牋牋牋牋32,460 牋牋牋牋 牋牋牋牋147,120

牋牋牋牋Maintenance 牋牋牋牋9,170 牋牋牋牋9,170...
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