Managerial Accounting Question:
In the 1800s Australia was a colony of England and most of its trade was with England. Australia primarily exported agricultural products such as wheat and imported manufactured goods such as steel, machinery, and textiles. The volume of trade measured in British pounds was roughly equal in the sense that exports equaled imports. (Imports were slightly larger as there were net positive investments being made in Australia.) However, in cubic feet of cargo being shipped, exports to England exceeded imports. A British pound of wheat required more cubic feet than 1lb of manufactured goods. Hence, and imbalance of shipping existed. Numerous ships would carry agricultural products to England but return to Australia empty because no cargo of manufactured goods existed.
Large sail-powered ships required substantial ballast (weight) in the hold to keep the ship sailing properly, especially in rough seas. Before leaving England empty, the ships would purchase stone from local quarries for ballast. However, once in Australia, the stone had no market value, and in fact had to be hauled from the harbor area.
Consider the following facts for a particular ship in England with a shipment of Australian cargo for England.
1) The ship has contracted to sail to Australia and return with a cargo of Australian wheat. The ship has no cargo scheduled for London to Sydney.
2) The wheat-shipping contract calls for paying the captain and crew 4,900lbs for the round trip. The wheat seller will arrange for and pay Australian dock hands 250lbs to load the wheat in Sydney, and the wheat purchaser will arrange for and pay English dock hands to unload the wheat in London. The ship's crew does not load or unload the cargo.
3) To sail to Australia, the ship requires 10 tons of ballast. (1 ton = 2,000lbs)
4) Stone can be quarried in England, transported to the docks, and loaded as ballast for 40lbs per ton. In Sydney, the stone can be unloaded and hauled away for 15lbs per ton.
5) Wrought iron bars of 10-foot lengths can also be used as ship ballast. Wrought iron bars can be purchased in England at 1.20lbs per bar. Each bar weighs 20 pounds. Wrought iron bars sell for 0.90lbs per bar in Sydney. The cost of loading the wrought iron in London is 15lbs per ton, and the cost of unloading it and transporting it to the Sydney market is 10lbs per ton.
Required:
a. Write a memo to the ship's captain describing what actions he should take with respect to using stone or wrought iron as ballast. Assume that interest rates are zero and all prices and quantities are known with certainty. Support your recommendations with a clearly labeled financial analysis.
b. Why do you think the price of wrought iron is lower in Sydney than in London?