Lamb Soap Corporation The Lamb Soap Corporation manufactures and sold a range of specialized liquid soap products throughout the United States. Many of these products required careful packaging, and the company had always made a feature of the special properties of the containers used. They had a special patented lining, made from a material known as GHL, and the firm operated a department specially to maintain its containers in good condition and to make new ones to replace those damaged beyond repair. The general manager, Mr. Welch, suspected for some time the firm might save money, and get equally good service by buying its containers from an outside source. After careful inquiries, he approached a firm specializing in container production, Boxes, Ltd. and requested a quotation. At the same time, he asked Mr. Myer, his chief accountant, to provide him with an up-to-date statement of the cost of operating the container department. The quotation from Boxes, Ltd., arrived within few days. The firm was prepared to supply all the new containers required, at that time running at the rate of 3,000 a year, for $250,000 a year, the contact to run for a guaranteed term of four years and thereafter to be renewable from year to year. If the required number of containers increased, the contract price would be increased proportionately. Additionally, and irrespective of whether the above contract was concluded or not, Boxes, Ltd., undertook to carry out purely maintenance work on the containers, short of replacement, for a sum of $75,000 a year, on the same contract terms. Mr. Welch compared these figures with the cost figures prepared by Mr. Myer, covering a year's operations of the container department of the Lamb Soap Corporation, which were as follows: Cost of Operating the Container Department: Mr. Myer's Figures Materials $140,000 Labor 100,000 Department overhead: Manager's salary $ 16,000 Allocated cost of plant space 9,000 Depareciation on machinery 30,000 Maintenance of machinery 7,200 Other expenses 31,500 93,700 $333,700 Proportion of general administrative overhead 45,000 Total cost of the department $378.700 Welch concluded no time should be lost in closing the container department and in entering into contracts offered by the Boxes, Ltd. However, he felt bound to give the manager of the department, Mr. Tuffs, an opportunity to question his conclusions before acting on it. Therefore, he called Mr. Tuffs in and put the facts before him, at the same time making it clear that Tuffs' own position was not at jeopardy; for even if his department were closed, there was another managerial position becoming vacant shortly to which Mr. Tuffs could be moved without loss of pay or prospects. Mr. Tuffs looked thoughtful and asked for time to think the matter over. The next morning, he asked to speak to Mr. Welch again, and said he thought there were a number of considerations that ought to be borne in mind before his department was closed. "For instance, he said, what will you do with the machinery? It cost $240,000 four years ago, but you will be lucky if you got $40,000 for it now, even though it's good for at least another four years. And then there is a stock of GHL (a special chemical) we bought a year ago for $200,000. At the rate we are using, it will last us for another four years or so. We used up about one-fifth of it last year. Myer's figure of $140,000 for materials probably includes about $40,000 for GHL. But it'll be tricky stuff to handle if we do not use it up. We bought it for $1,000 a ton, and you couldn't buy it for less than $1,200. But you wouldn't have more than $800 a ton left if you sold it, after you'd covered all the handling expenses." Welch thought Dyer ought to be present during this discussion. He called him in and put Tuffs' point to him. I don't much like all this conjecture, Myer said. I think my figures are pretty conclusive. Besides, if we are going to have all this talk about what will happen if,' don't forget the problem of space we are faced with. We are paying $17,000 a year in rent for a warehouse couple of miles away. If we close Tuffs' department, we could use some of that space and we would have all the warehouse we need without renting. That's a good point., said Welch. Though I must say that I am a bit worried about the men, if we close the department. I don't think we can find room for any one of them elsewhere in the firm. I could see whether Boxes, Ltd. can take any one of them. But some of them are getting on. There's Walters and Heinz, for example. They have been with us since they left school 40 years ago, and I think that the contract requires us to give them a small pension of about $3,000 a year each. Tuffs showed some relief at this. But I still don't like Myer figures, he said. "What about his $45,000 for the general administrative overhead. You surely don't expect to sack anyone in the general office if I'm closed, do you? "Probably not said Myer, but someone has to pay for these costs. We can't ignore them when we look at individual department, because if we do that with each department in turn, we shall finish up by convincing ourselves that directors, accountants, typists, stationery, and the like don't have to be paid for. And they do, believe me. "Well, I think we've thrashed this out pretty fully said Welch, but I've been turning over in my mind the possibility of perhaps keeping on the maintenance work ourselves. What are your views on that, Tuffs? "I don't know, said Tuffs, but it's worth looking into. We shouldn't need any machinery for that, and I could hand the supervision over to a foreman. You'd save $6,000 a year there, say. You'd need about one-fifth of the men, but you keep on the oldest. You wouldn't save any space, so I suppose the rent will be the same. I shouldn't think that the other expenses would be more than $13,000 a year. What about the materials? asked Welch. "We use about 10 percent of the total on maintenance, Tuffs replied. "Well, I 've told Boxes, Ltd., that I'd let them know my decision within a week, said Welch. I'll let you know what I decide to do before I write to them. QUESTIONS: 1. What are the alternatives available to Lamb Soap Company in dealing with the costs of the containers. 2. Consider the following two alternatives: a. Manufacture and service containers in-house. b. Outsource manufacture and service of containers to Boxes, Ltd. i. Identify the costs that are relevant in making this decision? ii. Assuming no additional information can be readily obtained, which alternative should Lamb Soap Company choose? 3. What additional information is necessary for a sound decision? Lamb Soap Corporation The Lamb Soap Corporation manufactures and sold a range of specialized liquid soap products throughout the United States. Many of these products required careful packaging, and the company had always made a feature of the special properties of the containers used. They had a special patented lining, made from a material known as GHL, and the firm operated a department specially to maintain its containers in good condition and to make new ones to replace those damaged beyond repair. The general manager, Mr. Welch, suspected for some time the firm might save money, and get equally good service by buying its containers from an outside source. After careful inquiries, he approached a firm specializing in container production, Boxes, Ltd. and requested a quotation. At the same time, he asked Mr. Myer, his chief accountant, to provide him with an up-to-date statement of the cost of operating the container department. The quotation from Boxes, Ltd., arrived within few days. The firm was prepared to supply all the new containers required, at that time running at the rate of 3,000 a year, for $250,000 a year, the contact to run for a guaranteed term of four years and thereafter to be renewable from year to year. If the required number of containers increased, the contract price would be increased proportionately. Additionally, and irrespective of whether the above contract was concluded or not, Boxes, Ltd., undertook to carry out purely maintenance work on the containers, short of replacement, for a sum of $75,000 a year, on the same contract terms. Mr. Welch compared these figures with the cost figures prepared by Mr. Myer, covering a year's operations of the container department of the Lamb Soap Corporation, which were as follows: Cost of Operating the Container Department: Mr. Myer's Figures Materials $140,000 Labor 100,000 Department overhead: Manager's salary $ 16,000 Allocated cost of plant space 9,000 Depareciation on machinery 30,000 Maintenance of machinery 7,200 Other expenses 31,500 93,700 $333,700 Proportion of general administrative overhead 45,000 Total cost of the department $378.700 Welch concluded no time should be lost in closing the container department and in entering into contracts offered by the Boxes, Ltd. However, he felt bound to give the manager of the department, Mr. Tuffs, an opportunity to question his conclusions before acting on it. Therefore, he called Mr. Tuffs in and put the facts before him, at the same time making it clear that Tuffs' own position was not at jeopardy; for even if his department were closed, there was another managerial position becoming vacant shortly to which Mr. Tuffs could be moved without loss of pay or prospects. Mr. Tuffs looked thoughtful and asked for time to think the matter over. The next morning, he asked to speak to Mr. Welch again, and said he thought there were a number of considerations that ought to be borne in mind before his department was closed. "For instance, he said, what will you do with the machinery? It cost $240,000 four years ago, but you will be lucky if you got $40,000 for it now, even though it's good for at least another four years. And then there is a stock of GHL (a special chemical) we bought a year ago for $200,000. At the rate we are using, it will last us for another four years or so. We used up about one-fifth of it last year. Myer's figure of $140,000 for materials probably includes about $40,000 for GHL. But it'll be tricky stuff to handle if we do not use it up. We bought it for $1,000 a ton, and you couldn't buy it for less than $1,200. But you wouldn't have more than $800 a ton left if you sold it, after you'd covered all the handling expenses." Welch thought Dyer ought to be present during this discussion. He called him in and put Tuffs' point to him. I don't much like all this conjecture, Myer said. I think my figures are pretty conclusive. Besides, if we are going to have all this talk about what will happen if,' don't forget the problem of space we are faced with. We are paying $17,000 a year in rent for a warehouse couple of miles away. If we close Tuffs' department, we could use some of that space and we would have all the warehouse we need without renting. That's a good point., said Welch. Though I must say that I am a bit worried about the men, if we close the department. I don't think we can find room for any one of them elsewhere in the firm. I could see whether Boxes, Ltd. can take any one of them. But some of them are getting on. There's Walters and Heinz, for example. They have been with us since they left school 40 years ago, and I think that the contract requires us to give them a small pension of about $3,000 a year each. Tuffs showed some relief at this. But I still don't like Myer figures, he said. "What about his $45,000 for the general administrative overhead. You surely don't expect to sack anyone in the general office if I'm closed, do you? "Probably not said Myer, but someone has to pay for these costs. We can't ignore them when we look at individual department, because if we do that with each department in turn, we shall finish up by convincing ourselves that directors, accountants, typists, stationery, and the like don't have to be paid for. And they do, believe me. "Well, I think we've thrashed this out pretty fully said Welch, but I've been turning over in my mind the possibility of perhaps keeping on the maintenance work ourselves. What are your views on that, Tuffs? "I don't know, said Tuffs, but it's worth looking into. We shouldn't need any machinery for that, and I could hand the supervision over to a foreman. You'd save $6,000 a year there, say. You'd need about one-fifth of the men, but you keep on the oldest. You wouldn't save any space, so I suppose the rent will be the same. I shouldn't think that the other expenses would be more than $13,000 a year. What about the materials? asked Welch. "We use about 10 percent of the total on maintenance, Tuffs replied. "Well, I 've told Boxes, Ltd., that I'd let them know my decision within a week, said Welch. I'll let you know what I decide to do before I write to them. QUESTIONS: 1. What are the alternatives available to Lamb Soap Company in dealing with the costs of the containers. 2. Consider the following two alternatives: a. Manufacture and service containers in-house. b. Outsource manufacture and service of containers to Boxes, Ltd. i. Identify the costs that are relevant in making this decision? ii. Assuming no additional information can be readily obtained, which alternative should Lamb Soap Company choose? 3. What additional information is necessary for a sound decision