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Lynchburg Foundry: The Ductile Dilemma

Two castings plants produce ductile iron return as a by-product of the manufacturing process. The two plants, Lynchburg and Archer Creek, can use all of their by-products in the production of subsequent castings. A third plant, Radford, makes cast-iron pipe. It produces only about 12% iron return (versus 40% to 50% for the other two plants) and could use more. As the 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. Thus, the central issue in the case is whether ductile iron return should be transferred from the Lynchburg and Archer Creek castings plants to the Radford pipe plant. The economic analysis shows that there is a substantial savings to the company if the iron return is transferred. The question, however, is, at what price? This is really a question of how to divide the company's savings among the three plants, each of which is a cost center. Related to this question are a number of other questions: the effect on plant performance; the effect on decisions to discontinue, modernize, or expand the plants; the effect on castings and pipe prices; and the effect on plant management's morale and performance. At present, 3,500 tons of ductile iron return are being transferred from Lynchburg to Radford because the pieces are too large to be remelted at Lynchburg economically. Radford pays freight, but no other cost is charged to Radford. This is more than half of the potential 6,000 tons of iron return that is feasible to transfer. Another issue to consider is whether this iron return, which cannot be used at Lynchburg, should have the same transfer price as the iron return that Lynchburg can use.