Make vs Buy Decision, Entrepreneurship in Todays Society - Case Study Example

? Make vs. Buy decision Grade (24th, Jan. Make vs. Buy decision Question a: There are four alternativesthat are open for available to Liquid Chemical. The first alternative would be that of allowing everything to remain as it is without changing anything. Alternative A: Maintaining the status quo This alternative will entail Liquid Chemical continuing with its operations as it was doing before, without enlisting the help the Packages, Inc. the relevant costs applicable in this alternative are: Cost of materials= $700,000 Cost of labor=$ 500,000 Overhead costs=$468,500 Administrative overheads=$225,000 Total costs for Alternative A: =$1,893,500 Therefore, the total costs applicable for this alternative will remain the same, and thus will not change the situation of the company. The advantage of this alternative is that no extra cost will be incurred and no further business interruption and inconveniencies will be experienced. The disadvantage is that there are no chances of reducing the costs involved. Alternative B: Outsourcing maintenance services Liquid Chemical continues to produce the packaging containers but outsource the costs of maintenance from Packages, Inc. this alternative will have the effect of maintaining all the other costs that are applicable in the container department, with an exception of the maintenance costs. However, Liquid Chemical will have to factor in the difference is the maintenance costs, considering that the maintenance costs incurred by the company while doings its maintenance will differ from the cost charged by Packages, Inc. to do the same work. The costs applicable for Alternative B include: Cost of materials= $700,000 Cost of labor=$ 500,000 Overhead costs=$468,500 Administrative overheads=$225,000 Total costs=$1,893,500 Add the cost of maintenance charges by Packages, Inc. annually, which is $375,000 It will give a total of $2,268,500 Less the cost of maintenance previously incurred by Liquid Chemical which is $36,000 The total cost for Alternative B: =$2,232,500 The advantage of this alternative is that only partial services will be outsourced, only partial business interruption and inconveniencies will be experienced. The disadvantage is that there are additional costs involved. Alternative C: Buy packaging containers but perform maintenance Under this alternative, Liquid Chemical can purchase the packing containers from Packages, Inc. but continue to do all the maintenance and repair work by itself, instead of outsourcing both services. This means that Liquid Chemical will continue to incur the costs associated with maintenance and repair work, while avoiding the costs associated with making the packing containers. However, the company will incur the new costs as charged by Packages, Inc. to supply the containers. The costs applicable for Alternative C include: New Costs: Cost of buying the packing containers from Packages, Inc. annually, which is $1,250,000 It will give a total of $3,143,500 Add the severance costs to be paid to the laid off employees=$20,000 Add other expenses estimated at=$65,000 Add the cost of maintenance material=$70,000 Total=$1,328,500 Less the cost of workers=$450,000 Less the cost of material=$700,000 Less the cost of other expenses=$157,500 Total=$1,307,500 The Additional New cost for Alternative C: =$21,000+ the initial cost 1,893,500=$1,914,500 Total cost for Alternative C: = $1,914,500 The advantage of this alternative is that only partial services will be outsourced, only partial business interruption and inconveniencies will be experienced. The disadvantage is that there are additional costs involved. Alternative D: Complete outsourcing This would entail the complete outsourcing of the packing containers and the maintenance services from Packages, Inc. Here, the company would forego all the expenses it was incurring in the Container department, and incur other new costs, which will be charged by Packages, Inc., to supply the packing material and to maintain and repair the damaged once. The costs applicable for Alternative D include: New cost of supplying packing material from Packages, Inc. =$1,250,000 New cost of maintenance and repair=$375,000 Add the New cost of pension for two employees at$15,000 for 5 years=$150,000 Add New cost of severance pay at a lump sum=$20, 000 Total cost for Alternative D: =$1,795,000 The advantage of this alternative is that there will be a reduction in costs. The disadvantage is that there will also be full business interruption and inconveniencies that will be experienced the company, as a result of enlisting a new contractor to meet all the functions of the container department. Question b: As a general manager, reaching a decision calls for the evaluation of the four alternatives, to determine which one would be more beneficial to the company, by reducing the costs applicable. In doing so, the costs of the four alternatives are assessed to see which one will give a saving of costs. This is done by comparing their Net Present value (NPV), which is obtainable by subtracting the current value from the expected future value: this is given below Net present value for alternative A: =1,893,500-1,893,500=0 Net present value for alternative B: =-$2,232,500-1,893,500= +$339,000 Net present value for alternative C: $1,914,500-1,893,500= +$21000 Net present value for alternative D: $1,795,000-1,893,500= -$98,500 In consideration of the four alternatives, it is clear that alternative D gives a cost reduction to the tune of $98,500 as indicated by a negative value, while all the other alternatives are increasing the costs. Therefore, the most viable alternative for the manager to take is alternative D, which entails a complete outsourcing of the packing containers and the maintenance services from Packages, Inc. Question c: There is additional non-financial information that Walsh needs, to be able to make a sound decision. First, he should consider the effect of laying off some of the company’s employees on the overall corporate image, as well as its impact on the morale of other employees. This is because, laying-off some employees may paint a bad image of the company on the corporate front, while also demoralizing the other employees, who would feel that their job security is also being threatened (Muller, 2010). Additionally, Walsh needs to ponder on the likely repercussion on the company’s business, should the outsourced contractor rescind the contract before the agreed period. This would highly disrupt the business of the company (Muller, 2010). By considering such vital information, on top of the financial information presented by the four alternatives, then, Walsh will be in a position to make a good judgment. Reference Muller, R. (2010). Decision Making Process: Entrepreneurship in today's society. Munchen: GRIN. Read More