Wellington Chemicals Division
Teaching Commentary
Overview
THIS CASE DEALS WITH ONE OF THE CLASSIC MANAGERIAL DECISIONS—MAKE VERSUS BUY. MOST COURSES IN MANAGERIAL ACCOUNTING INCLUDE AT LEAST ONE “MAKE/BUY” PROBLEM TO ILLUSTRATE THE APPLICABILITY OF “RELEVANT COST ANALYSIS” IN THINKING ABOUT SUCH DECISIONS.
This case is rich enough to support a fully-articulated “relevant cost” analysis. It also will support a “strategic” analysis with a little more digging by the students.
It is a great case to illustrate different cost analysis frameworks for a classic management decision.
Case Analysis
THE FOLLOWING LIST INCLUDES INTERMEDIATE CALCULATIONS/ESTIMATES WHICH CAN BE DERIVED EITHER FROM THE CASE OR FROM SOME BASIC LIBRARY RESEARCH. AT TUCK, I EXPECT THE STUDENTS TO BE ABLE TO DERIVE ITEMS SUCH AS THESE ON THEIR OWN. SOME INSTRUCTORS PREFER TO MAKE THIS LIST AVAILABLE TO STUDENTS ALONG WITH THE CASE TO SIMPLIFY THE ASSIGNMENT.
1. In 1965, the exchange rate was $2.80/£.
2. A worker is probably making about £3,000/year.
- A £1,500 pension at about 50% of regular pay
- The foreman makes £5,000, and a worker would be about 50% to 75% of that
- A US chemicals worker made about $7,000 (before fringes) in 1965 = ~£2,500
3. Thus, the workforce is about 15 people (£45,000 ÷ £3,000).
4. Wellington uses 40 tons of GHL per year (100,000/£500 per ton = 200 tons ÷ 5 years = 40).
5. Wellington uses 36 tons of GHL to make new containers (90%). This is 24 pounds per container.
6. How large are the containers?
- Steel Cost = £50,000 (70,000 - 20,000)
- In 1965, basic steel cost $360/ton in the U.S.
- This is about 390 tons of steel (£50,000 × 2.8 = $140,000 ÷ $360/ton)
- For 3,000 new containers, this is ~260 pounds per container, which is pretty big
- A standard 55 gallon drum weighs about 30 pounds
- Thus each drum holds probably about 500 gallons...
