REICHARD MASCHINEN, GMBH

Group 5Nguyen Thi Thanh Thao - M987Z237Nong Hong Sa – M987Z231

COMPANY PROFILEGrinding Machines Division (GMD) is

one part of Reichard Machines Company.

Headquarter located in Frankfurt, operated mainly as a holding company.

For almost 100 years, Reichard had manufactured industrial machines which it sold throughout Europe and North America. It enjoyed a reputation for high quality, technology leadership, and excellent customer service.

BUSINESS SITUATIONS In recent years many other manufacturers

had entered Reichard's markets with lower priced spareparts. Other companies had entered with lower quality and lower priced machines and parts.

Biggest competitor is Bruggeman Grinders, SA in Belgium, which manufacturing the plastic rings (one part of the machine) to take the place of steel rings (currently Reichard is using)

Mr. Kurtz (Managing Director) felt sure that competition would continue to intensify in the future. But, he was fully committed to Reichard's strategy of high quality, innovation and excellent service, at a price.

BUSINESS SITUATIONSAt another level, when the

marketing and manufacturing issues are considered, the complexity of the decision becomes apparent.

The main dilemma of the case is "How long can the firm stay with the substantially more profitable, but technologically obsolete, steel rings while still holding to its strategy of being a top quality producer at a fair price?"

Steel ring Plastic ringUseful life: 2 monthsaverage was four

rings per machine. Price: 325/100Big quantity in stock

4 times wearing properties than steel ring

The factory already had a plastics injection molding department.

the factory could be ready to produce plastic rings by mid-

September The additional molds and

tooling necessary could be produced for about $10,000, but would have to be specially designed which would take a few months

Surely get 10% market share

Mr. Goerner Sales manager

Mr. HainzDevelopment engineer

Mr. Metz of the Headquarter group

- strongly against selling any steel rings after the new plastic rings becameavailable-The result would affect the sale of machines

- plastic ring would completely destroy demand for the steel ring- sell the plastic ring only in Bruggeman's market area - continue supplying the steel ring until stocks were used up

- no problem with GMD getting ready to produce plastic rings, although hewas sceptical of the market acceptance of such a product- expect to recover the investment in steel inventory

What should be considered?This case deals with cost analysis for

assessing the economics of a product transition facing Reichard Maschinen.

also involves the broader spectrum of business issues related to the transition.

At one level, the economics of the situation need to be brought into focus; fixed costs, marginal costs, and sunk costs must be separated and evaluated for their "relevance" to the decision.

Apa yang harus dipertimbangkan?Konsep eliminasi overhead tetap yang

diterapkan pada jangka pendek, biaya relevan.

Konsep biaya yang sudah terjadi (sunk cost) dalam analisis biaya relevan.

Konsep dari aspek “produk substitusi” dari analisis kontribusi.

Penggunaan analisis di atas sebagai kerangka numerik sebagai pandangan dari keputusan harga.

Apa yang harus dilakukan?Mr. Kurtz harus memutuskan apa yang

harus diproduksi di masa depan dan apa yang dilakukan dengan persediaan yang ada saat ini. Dia memerlukan strategi jangka pendek dan jangka panjang.

Menghadapi pengenalan cincin plastik oleh salah satu kompetitor, Bruggeman, RMG perlu untuk memutuskan:

1) apakah mereka akan memulai memproduksi cincin plastik?

2) Kapan produksi tersebut dimulai, jika diperlukan.

Analisis Biaya Inkremental untuk Keputusan Jangka Pendek

Alternative 1: Menjual cincin baja yang ada dalam persediaan dan tidak memproduksi lagi cincin baja. (Mereka dapat melanjutkan penjualan sampai 37 minggu ke depan)

Alternative 2. Memproduksi 34,500 cincin baja. (Mereka dapat menjualnya dalam waktu 87 minggu)

Alternative 3. Memulai memproduksi cincin plastik di bulan September. (dengan membuang baja mentah)

Alternative 1: Menjual cincin baja yang ada dalam persediaan dan

tidak memproduksi lagi cincin baja.

Karena mereka tidak akan menimbulkan biaya produksi dan barang jadi yang akan dijual sudah dalam persediaan, biaya inkremental akan menjadi $ 0 seperti yang ditampilkan pada tabel di atas.

Biaya Inkremental per 100 cincinBahan Baku $0.00TKL $0.00OH variabel $0.00Total $0.00

Alternative 2: Memproduksi 34,500 cincin baja

Baja khusus yang digunakan dalam pembuatan cincin telah dibeli dan tidak ada pasar alternatif untuk baja mentah. tersebut Karena nilai skrap dari baja yang digunakan untuk membuat cincin adalah nol, biaya kesempatan dari bahan baku juga nol. Dengan demikian, tidak ada biaya bahan baku lanjut.

Mereka akan dikenakan biaya tenaga kerja langsung dalam periode ini dan upah yang akan dibayarkan yakni 30% dari upah reguler = 46.8 x 30% = 14.04

Biaya OH variabel adalah 80% dari biaya tenaga kerja langsung = 14.04 x 80% = 11.23

Biaya Inkremental per 100 cincinBahan Baku $0.00TKL $14.04OH variabel $11.23Total $25.27

Alternative 3: Memulai memproduksi cincin plastik di

bulan September Karena RMG perlu

mempersiapkan produksi plastik sampai September. Untuk jangka pendek, kami menganggap tidak ada ekspansi kapasitas, jadi kami akan mengecualikan biaya OH tetap diperkirakan oleh controller dan termasuk OH tetap tambahan yang terjadi dengan perolehan cetakan dan peralatan.

Untuk menghitung OH tetap tambahan, i. e. cetakan dan tooling, kita asumsikan masa manfaat peralatan ini adalah 5 tahun. Satu juga dapat mengasumsikan bahwa permintaan untuk cincin plastik akan mulai dengan 10% dari permintaan saat ini untuk cincin baja.

Biaya OH variabel adalah 80% dari biaya tenaga kerja langsung = 15.60 x 80% = 12.48

Permintaan tahunan untuk cincin plastik= 690 unit / minggu * 53minggu * 10% = 3.657 unit  

Biaya tambahan OH per 100 plastikBiaya per 100 unit = (Akuisisi biaya / (masa manfaat * permintaan tahunan)) * 100 = 10.000 * 100 / (5 * 3657) = $ 54,69

Biaya Inkremental per 100 cincin

Bahan Baku $4.20TKL $15.60OH variabel $12.48Tambahan OH tetap

$54.69

Total $86.97

Question 3:Pertanyaan ini meminta biaya

diferensial dari 25.450 cincin baja yang sudah berada dalam persediaan pada akhir Mei. Idenya di sini adalah untuk melihat bahwa 25.450 cincin baja sudah selesai dalam persediaan memiliki biaya diferensial nol. Tidak ada pekerjaan tambahan yang perlu dilakukan pada cincin tersebut.

Question 4:This question asks which ring is more profitable, steel or plastic.

Plastic Rings Contribution Full Cost

Revenue $340.00 $340.00

RM $4.20$4.20

DL 15.60 15.60

OH:Dept. 12.48 31.20 + 15.60

Admin. 15.60 $32.28 $66.60

Profit Contribution $307.72 $273.40

Steel Rings Steel Rings 25,450

Next Future Rings 34,500 in stock Rings

Contribution (690 per week X 52 weeks) = 35880

Full Cost (690 per week X 52 weeks) = 35880

Revenue $325.00 $325.00 $325.00 $325.00

RM 0 0 76.65 76.65

Labor 14.04 46.80 46.80

OH:Dept 11.23 37.44 93.60+ 46.8

Admin. 0 25.27 160.89263.85

Profit $325.00 $299.73 $164.11$61.15

Total Profit of Steel Rings

82,713 103,500 58,883 21,941

Volume of Plastic Rings

25450/4= 6363 34500/4 = 8625 690*52 = 35880 35880

Profit Contribution of 100 Plastic Rings

308 308 308 273.40

Total Profit of Plastic Rings

19,598 26,565 110,510 98,096

Question 4: Con’t1. For the next of 25,450 rings, steel rings are much more profitable than plastic rings.2. For the next 34,500 rings after that, steel rings are still much more profitable than plastic rings.3. For all rings beyond 59,950 units: teel rings are more profitable than plastic on a marginal contribution basis but plastic rings are more profitable than steel on a full cost basis.

Question 5: Long term cost analysis

The decision based on the incremental cost analysis is that the company do not produce any rings. However, we strongly recommend to analyse the profitability of producing plastic rings in the long run, because the analysis above does not include all the costs that will be incurred in the long run. For the long term analysis, we will take the full costing calculation made by the controller.

Costs per 100 RingsPlastic Steel

Material $4.20 $76.65Direct Labor $15.60 $46.80Overhead Manufacturing $31.20 $93.60 Selling and Adm. $15.60 $46.80

Cost total $66.60 $263.85

For the long run, the cost per 100 plastic rings is far less than that of steel rings. If the prices of both rings are the same, the plastic rings are profitable. It is clear that in the long run, steel rings will not take any share because of its high production cost.

However, even though the company shift to the plastic rings production and drop the steal rings, it still concerns as below. ◦Further price reduction◦Demand decrease

Price reduction

At the very beginning, we can expect high price and high margin on plastic rings.

However, the price of the plastic rings can be lowered to $82 per 100 units in the long run.

Demand decrease We can expect the

increasing demand for the plastic rings at the beginning, because there would be replacement demand from steel rings.

However, the demand will be ¼ of the current demand for the steel rings, because of its durability.

At the same time, the demand for the steel rings will be 0 in two and half years, assuming 10% decrease in three months.

Question 6: Recommendation Qualitative Analysis

Competitive Market: Given the plastic rings production is not very difficult (as RMG is trying to shift to plastic ring production soon) and it brings higher margin than steel rings, the market will be very competitive. Even if RMG does not produce the plastic rings, the plastic rings will be produced by other companies and the market will shift to plastic rings naturally.

Reichard Maschinen’s market leadership: By introducing the plastic rings into market earlier, the company will maintain their position as a leading industrial machine producer of high quality and technology.

Global Penetration: Given plastic rings’ higher OH cost structure and decreasing demand prospect, the company should expand their client base by global penetration. Since their competitor, Bruggeman, is only selling the plastic rings within Belgium, through this expansion, Reichard Maschinen GmbH could justify their plastic rings production.

Steel Rings are no longer feasible: The steel rings’ higher costs do not justify the continuous manufacturing under the competition.

Question 6: Recommendations Quantitative Analysis

In conclusion, considering all the aspects of short term incremental cost analysis, long term prospects of demand, price, profitability and quantitative analysis, we suggest followings◦Shift to plastics rings within a year◦Price at first, around $325◦Cut price as competition goes◦Differentiate ◦Go global and expand the customer base