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Make vs Buy - Case Study Example

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Make vs Buy

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

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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

Summary

Make vs. Buy decision Grade Course (24th, Jan. 2013) Make vs. Buy decision Question a: There are four alternatives that are open for available to Liquid Chemical. The first alternative would be that of allowing everything to remain as it is without changing anything…
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