Cost Analysis for Decision Making

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Managers are often asked to provide an analysis to support resource-allocation decisions that affect the company. Difficult choices are involved when deciding to close a department. Any action that consumes resources that could be put to better use must be justified. There are several alternatives to consider when making a decision. In the case of The Liquid Chemical Company, Mr. Walsh has to decide whether to keep the business running the way it is or reduce costs by choosing a different alternative. Currently they make the containers and perform maintenance on them when needed. His alternatives would include whether to outsource the maintenance, outsource the making of the containers or outsourcing everything. The decision of his employee’s welfare would be a decision as well. Does he continue to run the business as usual and keep his employees or does he outsource and lay them off? Certain relevant costs should be considered before a decision is made. An analysis of all costs and expenses need to be done to compare and decide if the choice to close a department is the best alternative. Costs for payroll, rent, materials are some of the biggest concerns. He will need to decide what to do with the machines he owns and whether he can get enough for them if he sells them. The other concerns would be more personal and would include downsizing and terminating employment for the workers. The decision of whether a severance package would have to be considered as well. A departmental shutdown should result in savings which can be determined by doing a cost analysis. Currently they make their own containers and maintain and repair them. This involves having rent for a warehouse to manufacture the containers. This also includes material costs, payroll for employees, supervisors and managers. This first alternative shows that total costs come out to $1,358,500.per year.

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