Wellington Chemicals Division

Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 4 pages in length and its case teaching package is 6 pages.

Abstract

This case is set in 1965 in a division of a major UK-based chemicals firm. The issue is make versus buy for packaging containers. The container is technologically advanced and is an important element of the value of the end product to the customer.

This case is rich enough to support a fully-articulated "relevant cost" analysis. It also will support a "strategic" analysis with a little more digging by the students.

It is a great case to illustrate different cost analysis frameworks for a classic management decision.

Linkages to Textbooks or Journal Articles/Fit Within a Course

This case deals with one of the classic managerial decisions—make versus buy. Most courses in managerial accounting include at least one "make/buy" problem to illustrate the applicability of "relevant cost analysis" in thinking about such decisions.

There are two distinctly different approaches to teaching this case. Some instructors prefer to force the students toward a sophisticated multi-year discounted cash flow comparison of the options. This can easily use up as much time as is available.

Under this approach, the judgment issues and strategic perspective are brought in only at the end of class. The day is primarily an exercise in complex cost comparisons.

Some instructors prefer to start with a strategic perspective and a simple cost analysis in which, over time, Packages Ltd. will be cheaper by 15% to 25% (our current cost of £52 per container versus £38 for Packages). Over time, a packaging company will make containers cheaper than a chemicals company. Do strategic issues offset the cost advantage or reinforce it? In this approach, the complex discounted cash flow comparisons are only brought in if students feel they are necessary to make the decision. Starting this way, students usually see fairly quickly that complex cost comparisons are not going to lead to a clear answer.

Under this approach, more of the class time is devoted to a subjective assessment of the risks and rewards from "make vs. buy" in the Wellington Chemicals context.

I use the case near the end of the required managerial accounting course as a review case to build judgment about how much cost analysis is really useful for strategic choices such as this one. I try to make sure the complex discounted cash flow calculations receive some attention. But I also try to make sure the class does not get bogged down in the numbers and lose sight of the essentially subjective strategic choice which must be made.

Study Questions

One common approach in analyzing a situation like this is to prepare a comprehensive, multi-year cash flows schedule for the various options. This requires careful attention to differential cash flows, a relevant time frame, inflation, taxation, and time value of money. If you choose this approach, be careful in carrying it through comprehensively and in considering what inferences it will support.

If you choose some other cost analysis approach, be sure you are clear as to why you are not doing a multi-year cash flow analysis.

• What conclusions do you draw from your cost analysis? What recommendations would you make to Mr. Walsh? Why?