Liquid Chemicals Case Analysis

A solution to case study
Liquid Chemical Company

A Proposal
Presented to

Dr. Madhumita Chakraborty
Indian Institute of Management, Lucknow
On
November 25th, 2008.

In
Partial Fulfillment of the Requirement for the Course
Management Accounting -II by Name Roll Number
Rajesh Kumar Snehi 24089
Sai Harish Chava 24090
Samarendra Singh 24092

INTRODUCTION The Liquid Chemicals Company (LCC) produces and sells a wide variety of high grade products throughout Great Britain. LCC uses high quality containers for packaging of its products. A separate department is designated for this purpose, which deals with manufacturing and maintenance of containers.
Mr. Walsh, the general manager of LCC, wishes to outsource both manufacturing and maintenance of containers to Packages Ltd. he wants to have a close look at the tradeoff associated with all the option available to him. Mr. Walsh is pondering over following options: Option A: Status quo Option B: manufacturing outsourced, maintenance in-house Option C: both manufacturing and maintenance outsourced Option D: manufacturing in-house, maintenance outsourced

Assumption: GHL not to be stored for more than four years

OPTION A COMPARED TO OPTION C

Manufacturing Maintenance
Option A  
Option C  

 : In-house
 : Outsourced

Incremental annual cost of Option A compared to Option C (Pounds Sterling)

Period< 4 years Period > 4 Years
Materials 6600 7400
Labor 4700 4700
Manager’s salary 800 800
Rent of warehouse 850 850
Depreciation (opportunity cost) of Machine 500 1500
Maintenance of machine 360 360
Other expenses 1575 1575
Total 15385 17185
Payment to Packages Ltd. (Savings) -16250 -16250
Net Incremental Cost -865 935

OPTION B COMPARED TO OPTION C

Manufacturing Maintenance
Option B  
Option C  

 : In-house
 : Outsourced
Only maintenance department; salary of foreman, laying-off