Cost Analysis for Decision Making - Essay Example

will continue making the containers and performing maintenance.)  Alternative B: Liquid Chemical Co. will continue making the containers, but it will outsource the maintenance to Packages, Inc.  Alternative C: Liquid Chemical Co. will buy containers from Packages, Inc., but it will perform the maintenance.  Alternative D: It is completely outsourced. Packages, Inc. will make the containers and provide the necessary maintenance Alternative A: In case if Liquid Chemical Company opt this alternative in which it will continue to make containers and performing simultaneously, the company will have to incur all the necessary costs as all those costs would be relevant costs needed to make and maintain the current production.

Relevant costs pertaining to this particular alternative are full material costs amounting to $500,000, full labor cost which includes cost of supervisors and workers amounting to $500,000 cumulatively. Moreover, the full departmental costs of Dyers’ that amounts to $358,000 would also be a part of this alternative. Overall, this alternative would incur $1,717,000. The costs that are not relevant to this particular alternative are contract costs to Packages Inc in relation to maintenance and container, severance cost and pension cost.

The advantage of this alternative is that the company will have control over its production pattern, job security of Dyer’s departmental workers etc. . There will be a reduction of $50,000 in material cost, $90,000 in labor cost and $65,000 in departmental overhead costs. But additional $375,000 contract cost need to be incurred as a result of outsourcing the maintenance task. The main advantage of this alternative is that the company would be in a better position to concentrate on its core activity of making the containers and outsource the secondary activity of maintenance.

The disadvantage of this alternative is that it is more costly than alternative A resulting in addition of $188,500. Alternative C: This alternative requires that Packages Inc. should provide containers to Liquid Chemical Company but the Liquid Company should perform the maintenance. This alternative would lead to substantial cost reductions in terms of material, labor and overheads including the departmental head’s salary of $80,000 as his services will no longer be required because of closure of this department.

However, he would be compensated by transferring to some other department. The main contract fee of providing the containers that amounts to around $1,250,000 would be the most relevant cost in this regard. Overall, this alternative is more costly than previous two alternatives incurring around $1.6m. Alternative D: The final alternative provides Liquid Chemical Company to outsource both making of containers as well as performing maintenance services. This alternative would result in vanishing of all material, labor and overhead costs.

At the same time the huge costs relating to contract fees, severance and pension would make this alternative as the most costly alternative as a whole. This alternative would snatch the control of Liquid Chemical Company over the quantity and quality of the desired level. Part