Jake Chemicals – Short-Term Decision Making
“If these new products are to be competitively priced, we havegot to do something about
our container costs” said Mr. Walsh. Walsh is the generalmanager of Jake Chemicals
which manufactured and sold a range of high-grade chemicalproducts. These products
required careful packing and the company made a special featureof the properties of the
containers used. They used patented lining made from a materialknown as GHL, and the
firm operated a department especially to maintain its containersin good condition and to
make new ones to replace those that were past repair.
“I believe that we can achieve substantial economies if we buyour containers from an
outside source” continued Walsh. “I have been making someinquiries and it appears that
Packages would offer us a contract, for five years certain, tokeep our containers in good
repair and to make all the containers we are planning to need.This would cost £500,000
per year and I believe they would offer us as good a service aswe could get elsewhere, or
by doing the job ourselves. The equivalent cost of doing itourselves is £578,000 per year
so that over a five year period we would save nearly £400,000 ifwe make the change
now.”
The £578,000, which Walsh quoted was made as follows:
£
Materials 200,000
Labour 145,000
Manager’s salary 34,000
Rent 45,000
Depreciation of machinery 33,500
Maintenance of machinery 10,500
Other expenses 42,500
510,500
Proportion of general administrative overheads 67,500
578,000
Mr. Duffy, the manager of the containers department, lookedthoughtful and asked for
time to think the matter over. The next morning he asked tospeak to Walsh again, and
said he thought there were a number of points that ought to beborne in mind before his
department was closed. “For instance”, he said, “we would haveto scrap the machine. It
cost us £360,000 three years ago, but there isn’t a market forsecond-hand equipment of
this type and you’d be lucky if you got £50,000 for it now, eventhough it’s good for
another five years. And then there’s the inventory of GHL (thespecial chemical) we
bought a year ago. That cost us £150,000. We used up about thirdof it last year. The
material cost you quoted yesterday (£200,000) probably includesabout £50,000 for GHL.
We bought it for £1,500 a ton, and you couldn’t buy it today forless than £1,800, but it is
tricky stuff to handle and if you sold it you wouldn’t have morethan £1,200 a ton left after
handling expenses have been allowed for.”
Walsh admitted that Duffy had raised a number of points thatought to be borne in mind.
He also pointed out that Duffy need have no fear of redundancybecause, if his department
were closed, he would be moved to another managerial post whichwas shortly becoming
vacant, without loss of pay or prospects.
Duffy seemed relieved to hear this, but said that he was worriedabout the workers in his
department. “Perhaps you could see if Packages would take someof them on”, he said
“but otherwise I am afraid I cannot see them fitting into any ofour other sections without
considerable retraining.”
Walsh agreed and said he would see what could be done. He wenton, “Of course the
closure of your department would release much needed space. Atthe moment we are
renting outside warehouse space which is costing us £45,000 ayear. The closure of your
department would mean we would have all the additional space weneed without outside
renting.”
“Do you think there would be any saving in generaladministrative overheads?” asked
Duffy. “As you know, I am being charged £67,500 a year for thisservice from Head Office.”
“Probably not” said Walsh, “but remember that someone will stillhave to pay for these
costs and we can ignore them in our calculations. Well, I thinkwe have thrashed this out
pretty fully. This has been a useful discussion. I will let youknow what I decide by the
end of the week.”
Questions
1. From the information given in the case, if Walsh signs withPackages will Jake
Chemicals be better off or worse off financially?
