Hi, The question is to prepare a memo to describe the findings,conclusion,and recommendation. I uploaded the case, the hints, and the requirement. please answer me ASAP, I appreciate!

Hi, The question is to prepare a memo to describe the findings,conclusion,and recommendation. I uploaded the case, the hints, and the requirement. please answer me ASAP, I appreciate!

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I meant to give you the attached information with the Wellington case.

A few useful beginning

calculations have been made in the attachment below.

The essence of the case is to isolate the after tax cash flows that are relevant for decision making.

In this instance, to the four make or buy options presented in the case.

The four make or buy options are:

#1 Make both the containers and their maintenance

#2 Make containers and Buy maintenance

#3 Buy containers and Make maintenance

#4 Buy both the containers and their maintenance

Don’t worry about calculating the present values.

Simply make the after tax cash flow calculations of the costs of each option over a four-year

period (the remaining life of the equipment and the GHL inventory) to find the lowest total cost

alternative.

For example, the total cost of steel over the four years will be 200 (British pounds) before taxes

for options #1 & #2; zero for options #3 & #4.

There are different mixes of the several costs

besides steel for each of the options to be found in the case.

Find the total after-tax cost for each

of the four options.

Be sure to include tax shelters for any sale of inventory or equipment.

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Wellington Chemicals Division

Teaching Commentary

OVERVIEW

T

his 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

This teaching commentary was prepared by Professor John K. Shank of the Amos Tuck School of Business.

35-1

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7.

Since the Packages Ltd. price of £41.67 (£125,000

÷ 3,000) is fixed

for 5 years, there must be an

inflation factor included.

At ~4% inflation,

Packages is really charging about £38 the first year,

with a 5-year trend of about 38, 40, 42, 44, 46.

8.

At about 5 pounds per gallon (conversion factor),

each drum holds about 1.25 tons of whatever

chemical Wellington is selling.

9.

If the current GHL price of £600/T is typical for

specialty chemicals, the sales value of one drum

full of chemicals is about £750.

10. It is not clear how Administrative Overheads are

allocated, but £22,500 is 50% of hourly labor.

Allocation based on direct labor would have been

very typical in 1965.

11. The cost at Wellington for “maintenance only” is

as follows, per Duffy’s estimates:

Manager

0

Foreman

5,000

(Same)

Workers

9,000

(20%

45,000)

GHL

2,000

(10%

20,000)

Other Expenses

6,500

Per Duffy

Space Costs

4,500

Same

Overhead Allocation

4,500

(50%

9,000)

£31,500

12. Each new drum thus costs £52.6 (189,350 – 31,500

÷ 3,000), fully absorbed.

This compares to the

“buy” cost of ~£38 (point #7) in 1965.

13. The drums are re-used many times, according to

the case, with regular maintenance.

Since each

drum is used 12 times, on average, the cost per use

is only about £4.4, which is less than 1% of the

value of the contents (estimated at £750).

Taking a very simple view of the problem, the

following series of arguments can be made:

Level 1

We make

everything that is important because

that is the only way to maintain full control.

Level 2

Buying

is

cheaper

(£189,350

versus

£162,500), so outsource if possible.

Level 3

On an incremental cost basis, making

is

cheaper (£162,500 versus £147,350 [£189,350

less depreciation of £15,000 and less allocated

costs of £4,500 and £22,500]), so do not

outsource.

A more sophisticated analysis would consider

multi-year cash flows, taxes, tax shields, inflation and

the time value of money over some relevant planning

horizon.

Such an analysis is presented below using a

four-year horizon—the remaining life of the equipment

and the GHL inventory.

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