The Senslit Co. Ltd manufactures a range of light-sensitive papers used in photographic processes. The paper, once
Question:
The Senslit Co. Ltd manufactures a range of light-sensitive papers used in photographic processes. The paper, once manufactured, is stored in specially constructed crates lined with 'photon'. These crates are manufactured and maintained by a special department within the company. During 1984 the department's operations cost £38,170 made up as follows:
£ £
Direct materials (including 'photon') 14,000 Direct labour 10,000 24,000 Overhead Departmental manager 1,600 Depreciation of machinery 3,000 Maintenance of machinery 720 Rent (portion of warehouse) 900 Other miscellaneous costs 3,150 9,370 33,370 Administrative overhead (20% of direct costs) 4,800 38,170 T he Packaging Co. Ltd has approached the Senslit Co. offering to make all the crates required on a four-year contract for £25,000 p.a.
and/or to maintain them for a further £5,000 p.a. Further investigation reveals that:
(a) The machinery used in the department cost £24,000 four years ago and will last for four more years. It could currently be sold for £5,000. It is needed in the manufacture of the crates but not for maintenance purposes.
(b) A stock of 'photon' was acquired last year for £20,000. One-fifth has been used this year (£4,000 has been included in the material cost). It originally cost £100 per ton but the replacement cost is £120 per ton, and it could currently be sold for £80 per ton.
(c) The Crate Department necessitates the renting of warehouse space for £1,800 p.a. The department only uses one-half of the space, the rest lies idle.
(d) If the department were closed all the labour force will be made redundant, but three of the men (current salary each £1,000 p.a.)
will each receive a pension of £500 p.a.
(e) In the event of. closure the manager will be transferred to another department.
(f) If Senslit continued to maintain the crates (while the Packaging C o. manufactured):
(i) the machinery will not be required, (ii) the manager will remain in the department, (iii) the warehouse space requirements will not be reduced, (iv) only 10 per cent of all materials will be used, (v) only one employee earning £1,000 p.a. will be pensioned off at £500, (vi) the miscellaneous costs will be reduced by 80 per cent.
(g) If Senslit continued to manufacture (while the Packaging Co.
maintained):
(i) the machinery will be required, (ii) the manager will remain in the department, (iii) the warehouse space will be required, (iv) 90 per cent of all the materials will be required, (v) miscellaneous costs will be reduced by 20 per cent.
Required:
Evaluate the four possible courses of action by identifying the relevant cash flows over the four-year period, and advise management accordingly, indicating what other information may be relevant.
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