Liquid Chemical Company

Case: Liquid Chemical Company

Question 1: Cost analysis

OPTION 1: Assumptions

- Material cost: from the £ 7,000, £ 2,000 goes to GHL which is a sunk cost because we bought it last year for £ 10,000. We don’t take these sunk costs into account in our decision.

- Machinery: the £ 12,000 is also a sunk cost. We don’t take these into account either in our decision.

- Labour, manager’s salary, rent office space, maintenance machinery, other expenses, rent warehouse and general overheads stay the same.

- Depreciations cannot be mentioned because these are costs that aren’t represented in cash flow.

OPTION 2: Assumptions

- We assume that the GHL and the machinery are sold in the first year. Of the GHL we already used 40 tons (of the initial 200 tons). At a price of £ 40/ton that gives a value of £ 6,400. The value of the machinery is now only £ 2,000.

- Walters and Hines will retire and for that they get a pension of £ 150 each.

- We outsource the supply and the maintenance, which comes down to £ 16,250 per year (£ 12,500 + £ 3,750).

- General overheads stay the same, an amount of £ 2,250 per year.

- GHL: £ 10,000 is the sunk cost of GHL. We bought it last year and it’s not relevant to make our decision.

- Machinery: the £ 12,000 is also a sunk cost that we don’t take it into account in our decision.

OPTION 3: Assumptions

- Material cost: from the £ 7,000, £ 2,000 go to GHL which is a