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Economy Shipping Company Essay

975 words - 4 pages

Estimating Funds Requirements—Short-Term Sources of Finance
Economy Shipping Company (Abridged)
Copyright © 1973 by the President and Fellows of Harvard College.
Harvard Business School case 274—092.
In the spring of 1950 the controller of Economy Shipping Company, located near
Pittsburgh, was preparing a report for the executive committee regarding the feasibility of
repairing one of the company’s steam riverboats or of replacing the steamboat with a new dieselpowered
boat.
The Economy Shipping Company was engaged mainly in the transportation of coal from
the nearby mines to the steel mills, public utilities, and other industries in the Pittsburgh area.
Occasionally, the company’s ...view middle of the document...

It was believed that if
these parts were sold on the market they would bring only around $30,000. They could not be
used on any of the other Economy Shipping steamboats.
Currently, the Conway was operated by a crew of 20. Annual operating costs for the 20-
person crew are shown in Table A.
TABLE A
Annual Operating Costs for the Conway and Its Crew
Wages $110,200
Vacation and sickness benefits $1,880
Social security payments $2,400
Life insurance $800
Commissary supplies $15,420
Repairs and maintenance $24,400
Fuel $34,500
Miscellaneous service and supplies $12,550
Total $203,150
The controller estimated that the cost of dismantling and scrapping the Conway at the end
of its useful life after the overhaul would be offset by the value of the scrap and used parts taken
off the boat.
An alternative to rehabilitating the steamboat was the purchase of a diesel-powered boat.
The Quapelle Company, a local boat manufacturer, quoted the price of $325,000 for a diesel
boat. An additional $75,000 for a basic parts inventory would be necessary to service a diesel
boat, and such an inventory would be sufficient to service up to three diesel boats. If four or
more diesels were purchased, however, it was estimated that additional spare parts inventory
would be necessary.
The useful life of a diesel-powered boat was estimated to be 25 years; at the end of that
time the boat would be scrapped or completely rehabilitated at a cost approximately equal to that
of a new boat. The controller did not contemplate the possibility of diesel engine replacement
during the 25-year life, because information from other companies having limited experience
with diesel-powered riverboats did not indicate that such costs needed to be anticipated. A
general overhaul of the engines, costing $60,000 at current prices, would, however, be expected
every 10 years.
After consulting the Quapelle Company...

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