Given the information that Mr.

Perfecto was able to gather, he would then be able to make a carefully thought-out decision based on the cost to benefit balance of each option that he could consider. This information, comprised mostly of various costs related to the four possible alternatives, will assist Mr. Perfecto in making a reliable, quantitative forecast as to which alternative will be most beneficial to the company. Alternative 1: Maintain status quo The first scenario involves dismissing all suggestions to buy containers from an outside supplier and outsource any of the companys functions. All the current operations will continue as is and all the costs that are already being incurred will also stay the same. These costs include Direct Materials, Direct Labor and the Departments Manufacturing Overhead costs. However, taking into consideration the possible gains should Mr. Perfecto choose any of the other options, the opportunity costs for the rent of the warehouse, sale of the machine and the sale of ABC materials. The primary advantage of this option is the fact that the company would be able to maintain control over their operations and essentially, the quality of their products and there will be no wastage of any materials that have already been paid for. The figures that relate to this scenario are as follows: Direct Materials Labor Supervisors Salary Workers Wages Departments Manufacturing Overhead Managers Salary Department Rent Maintenance on Machinery Portion of General Overhead Others Opportunity Costs Warehouse Rent Sale of Machine Sale of ABC Materials Total Cost: 800,000 450,000 360,000 2,250,000 1,575,000 850,000 2,000,000 800,000 21,085,00 P 7,000,000 500,000 4,500,000

0 Alternative 2: Total outsourcing The second option entails that the company will accept all offers to outsource the production of containers together with the maintenance and repair works on the existing packaging containers. Choosing this alternative means that the company will completely drop their Packaging Container Department and will no longer incur the expenses related to running the department. Total outsourcing will also entail that they will be relegating, to some extent, the quality control of their finished product to an outside company. Despite the cut costs due to the discontinuation of container production, the company will incur new costs that go with hiring Containers Inc. These are the costs of packaging, repair and maintenance. Also, the company will have to shoulder the cost of severance pay plus pension for the employees that will be let go. Lastly, Mr. Perfecto should take into consideration the value of ABC materials that will no longer be used should he decide to close the department. The computations for total outsourcing are as follows: Cost from Containers Inc. Packaging Repair and Maintenance Cost from Company Severance Pay Pension (750,000 x 2) Opportunity Costs Unused ABC materials Total Cost: P12,500,00 0 3,750,000 200,000 1,500,000

800,000 P18,750,0 00

Alternative 3: Purchase containers and maintain control over repairs and maintenance

Like the previous scenario, the company will not have to shoulder the expenses related to producing their own containers but will shoulder the cost of packaging from Container Inc., severance pay for the employees, manufacturing overhead for the department and the cost of materials for the maintenance and repairs to be conducted. To add to that will be the costs related to maintaining certain functions of the department such as the salary of the workers and the maintenance of the machinery. The relevant opportunity costs for this scenario are the possible savings on the warehouse rent as well as the wastage to be incurred because of the outsourcing of containers. This may be a significantly labor and cost effective alternative because only the most cumbersome function of producing containers will be relegated to an outside firm while the less labor-heavy function of repairs and maintenance will be performed by the company for a fraction of the price offered should they outsource this as well. Computations for purchasing containers and maintaining control over repairs and maintenance are as follows: Cost from Containers Inc. Packaging Cost from Company Retained Workers Wages Maintenance on Machinery Severance Pay Manufacturing Overhead Materials for Repair and Maintenance (360,000 x 10%) Opportunity Costs Warehouse Rent Sale of ABC Materials Total Cost: P12,500,00 0 900,000 360,000 200,000 650,000 36,000

850,000 800,000 P16.296,0 00

Alternative 4: Outsource repairs and maintenance only.

The last alternative entails that the company will still produce their own containers and maintain all the related costs but also pay for the outsourcing of repairs and maintenance from Containers Inc. This scenario will allow the company to focus on the more important function of production. Non-economic benefits aside, the company must consider the actual figures to determine if choosing this option will be better for them in the long run. The computations for this Direct Materials Labor Supervisors Salary Workers Wages Departments Manufacturing Overhead Managers Salary Department Rent Portion of General Overhead Others Severance Opportunity Costs Sale of Machine Sale of ABC Materials Costs from Containers Inc. Repair and Maintenance Total Cost: 800,000 450,000 2,250,000 1,575,000 200,000 2,000,000 800,000 3,750,000 P23,825,00 0 Here are the figures for each of the scenarios side by side: Alternative 1: Maintain status quo Alternative 2: Total outsourcing Alternative 3: Outsource containers, perform P21,085,000 P18,750,000 maintenance P16.296,000 P23,825,000 Alternative 4: Outsource maintenance only P 7,000,000 500,000 4,500,000

Based on the figures alone, the most cost effective option would be the third option where the company would accept Containers Inc. offer for 3000 containers at P12,500,000 a year while still continue performing the maintenance and repairs on existing packaging containers. These figures do not ultimately mean that the 3rd option is the most profitable and beneficial for the company overall and in the longterm as well. However, other non-economic factor should be gone over by Mr. Perfecto in order to make a final decision.