Wellington Chemical

Wellington Chemical Company

Simplistic view of the case:

Option 1: We make everything that is important because that the only way to maintain full control.

Option 2: We buy both the containers and the maintenance because buying is cheaper. (£189,350, from the statement, versus £162,500, 125k for containers + 37.5k for maintenance)

Options 3: On an incremental cost basis, making is actually cheaper (£162,500 versus £147,350 [£189,350 less depreciation of £15,000 and less allocated costs of £4,500 and £22,500]), so do not outsource.

Costs for maintenance only at Wellington:

Manager 0

Foreman 5,000 (Same)

Workers 9,000 (20%  45,000)

GHL 2,000 (10%  20,000)

Other Expenses 6,500 Duffy said this

Space Costs 4,500 Same

Overhead Allocation 4,500 (50%  9,000)

£31,500

A. Costs Not Relevant

Allocated Space Cost 4,500

Allocated Overhead 22,500

Depreciation 15,000

GHL 20,000

1 2 3 4

Make Make Containers Buy Containers Buy

Options Both Buy Maint. Make Maint. Both

B. 4 Year Total Cash Flows (000)

Materials (steel only) (50*4) 200 200 0 0

Workers 180(15*4*3) 144(12*4*3) 36(3*4*3) 0

Foreman 20 20 20 0

Manager 32 32 0 0

Other Expenses 63 37 26 0

Machinery Maintenance 14.4 14.4 0 0

Purchase Contract 0 150(37.5*4) 500(125*4) 650(150+500)

Sale of GHL 0 (6.4) (57.6) (64)

Sale of Equipment 0 0 (20) (20)

Saved Outside Rent ____ ____ ____ (34)

Net 509.4 591 504.4 532

Four year cash flow analysis

Recommendation:

We recommend the “Buy containers, make maintenance” option as it will be the most cost effective method throughout the next 4 year period. It seems as though it would be more profitable in general to outsource the production of the containers, because according to our analysis, the least cost effective option is making the containers and buying the maintenance. So, outsourcing is definitely an option that should be considered.