Lynchburg Foundry: The Ductile Dilemma

11 Pages Posted: 21 Oct 2008

See all articles by Richard Brownlee

Richard Brownlee

University of Virginia - Darden School of Business

Abstract

Two castings plants produce ductile iron return as a byproduct of the manufacturing process. The two plants, Lynchburg and Archer Creek, can use all of their byproduct in the production of subsequent castings. A third plant, Radford, makes cast-iron pipes. It produces only about 12% iron return (versus 40% to 50% for the other two plants) and also could use more. Since iron return used in the pipe plant substitutes for high-cost pig iron, it appears that a transfer could be worthwhile, because in the castings plants, the iron return substitutes for a lower-cost mix of pig iron and steel scrap. The central issue in the case then is this: Should ductile iron return be transferred from the Lynchburg and Archer Creek castings plants to the Radford pipe plant? The economic analysis shows there is a substantial savings to the company if the iron return is transferred. The question then becomes, at what price? This is really a question of how to divide the company's savings between the three plants, each of which is a cost center. Related to this question are a number of other issues: (1) the effect on plant performance, (2) the effect on decisions to discontinue, modernize, or expand the plants, (3) the effect on castings and pipe price, and (4) the effect on plant management morale and performance. At present, 3,500 tons of ductile iron returns are being transferred from Lynchburg to Radford because the pieces are too large to be economically remelted at Lynchburg. The only cost Radford pays is freight. This is over half the potential 6,000 tons of iron return that it is feasible to transfer. An issue to consider is whether this iron return, which cannot be used at Lynchburg, should have the same transfer price as the iron return Lynchburg can use.

Excerpt

UVA-C-2214

Rev. Jun. 15, 2009

LYNCHBURG FOUNDRY: THE DUCTILE DILEMMA

Martin Peterson, the materials manager for Lynchburg Foundry, was faced with the controversial decision of whether it was economically desirable to ship ductile iron return from the castings plants at Lynchburg and Archer Creek to the pipe-making plant in Radford, Virginia. If so, he needed to figure out the best way to implement his decision, including the establishment of an appropriate transfer price or prices.

Founded in 1896 as the Lynchburg Plow Company, manufacturing gray iron plows and plow replacement parts, it represented one of the oldest manufacturing companies in the Commonwealth of Virginia. The company grew quickly and soon began to diversify. With the addition of cast iron pipe production in the early 1900s, the company changed its name to the Lynchburg Foundry Company. In 1948, with the discovery of ductile iron, a new form of cast iron with properties similar to steel, the company became a major producer of gray and ductile iron precision castings and pipe. The precision castings were produced for cars, trucks, construction equipment, and farm equipment. The pipe was produced for municipal water systems and home construction. The company had over 4,000 employees at its three manufacturing facilities in Virginia.

Lynchburg and Archer Creek Castings Plants

. . .

Keywords: Transfer pricing By-product costing Relevant costing

Suggested Citation

Brownlee, Richard, Lynchburg Foundry: The Ductile Dilemma. Darden Case No. UVA-C-2214, Available at SSRN: https://ssrn.com/abstract=908100

Richard Brownlee (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4800 (Phone)

HOME PAGE: http://www.darden.edu/faculty/Brownlee.htm

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