Q (LCL) had a container division that manufactured containers for its specialty chemicals division. Over a...

  

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Q (LCL) had a container division that manufactured containers for its specialty chemicals division. Over a period of time, manypacking companies were set up with better technology and plant facilities. While exploring an optionof outsourcing the activity of container production, LCL could identify a vender, Special Packages Ltd.(SPL) who could meet LCL's specifications. The following details were available (all amounts in '000s) (a) The annual demand for containers was 3,000 units. (b) The vendor had quoted 16,500 per year for this volume. The amount would be proportionately increased if the volume exceeded 3,000 units. The contract period was guaranteed term of five years. (c) The current cost structure of making 3,000 containers in-house per year was as follows: Cost Item Amount per year 1. Direct material 2. Direct labour 3. Manager's salary 4. Space rent 5. Depreciation of machinery 6. Maintenance of machinery 7. Other cash manufacturing expenses 8. Proportion of general admin overheads 7,000 5,000 800 450 1,500 360 1,575 2,250 TOTAL 18,935 (d) LCL would incur one-time retrenchment cost of 1,500 if the container division was to be closed down. (e) The manager's position was not in jeopardy; for even if his division were to be closed, there was another managerial position shortly being created to which he could be moved without loss of pay or prospects. (f) LCL was facing a problem of space. It was paying 850 per year in rent for a warehouse a couple of kilometers away. If the container division would be closed, then LCL would have all the warehouse space needed without renting. (e) The salvage value of machinery was expected to be 2,000. (h) If LCL decides to outsource containers, the company would save around 1,000 of general admin overheads. Required: Should LCL outsource manufacturing of containers? Show your calculations (for the contract period of five years) in the following table: (10 Marks) (Show amount in '000s) Relevant cost/benefit Option: Do not outsource Option: Outsource TOTAL Your Recommendation: Q (LCL) had a container division that manufactured containers for its specialty chemicals division. Over a period of time, manypacking companies were set up with better technology and plant facilities. While exploring an optionof outsourcing the activity of container production, LCL could identify a vender, Special Packages Ltd.(SPL) who could meet LCL's specifications. The following details were available (all amounts in '000s) (a) The annual demand for containers was 3,000 units. (b) The vendor had quoted 16,500 per year for this volume. The amount would be proportionately increased if the volume exceeded 3,000 units. The contract period was guaranteed term of five years. (c) The current cost structure of making 3,000 containers in-house per year was as follows: Cost Item Amount per year 1. Direct material 2. Direct labour 3. Manager's salary 4. Space rent 5. Depreciation of machinery 6. Maintenance of machinery 7. Other cash manufacturing expenses 8. Proportion of general admin overheads 7,000 5,000 800 450 1,500 360 1,575 2,250 TOTAL 18,935 (d) LCL would incur one-time retrenchment cost of 1,500 if the container division was to be closed down. (e) The manager's position was not in jeopardy; for even if his division were to be closed, there was another managerial position shortly being created to which he could be moved without loss of pay or prospects. (f) LCL was facing a problem of space. It was paying 850 per year in rent for a warehouse a couple of kilometers away. If the container division would be closed, then LCL would have all the warehouse space needed without renting. (e) The salvage value of machinery was expected to be 2,000. (h) If LCL decides to outsource containers, the company would save around 1,000 of general admin overheads. Required: Should LCL outsource manufacturing of containers? Show your calculations (for the contract period of five years) in the following table: (10 Marks) (Show amount in '000s) Relevant cost/benefit Option: Do not outsource Option: Outsource TOTAL Your Recommendation:

Answer rating: 100% (QA)

Relevant CostBenefits Dont Outsource Outsource Working Direct Material 35000 0 7000 5 Direct labor 2... View the full answer