Case Analysis: Reichard Maschinen, Gmbh
Case Analysis
Reichard Maschinen, GmbH
Issue of the case
Facing the introduction of plastics rings by one competitor, Bruggeman, Reichard Maschinen, GmbH (RMG) needs to decide 1) whether they will start to produce plastic rings and 2) when to start the production, if needed.
1. Incremental cost analysis
For the short run, RM has the following three alternatives. We will propose to limit the time span of this analysis to 6 months and assume there will be no change in capacity to produce rings within this period. We will recommend to evaluate the following three options.
Alternative 1. Sell steel rings which are already in inventory and do not produce steel rings.
(They can continue to sell steel rings for 37 weeks with this inventory.)
Alternative 2. Produce next 34,500 steel rings. (They can sell steel rings for 87 weeks.
)
Alternative 3. Start to produce plastic rings in September.
(Throw away steel raw materials.
)
Incremental cost on alternative 1 (Sell steel rings which are already in inventory and do not produce steel rings.)
Because they will not incur any production cost and the finished goods to be sold are already in inventory, the incremental cost will be $0 as shown in the right table.
One can also point out that the 70% of wages will be incurred during the summer, but it is common to the three alternatives and will not be included in the incremental costs.
Incremental cost on alternative 2 (Produce next 34,500 steel rings.)
With this alternative, RMG can finish the production during the summer slack season. They will incur the direct labor cost in this period and the wages that will additionally paid will be 30% of the regular wages. The variable OH cost is 80% of direct labor costs. The total incremental costs are as shown in the right table.
Incremental cost on alternative 3 (Start to produce plastic rings in September.)
Because RMG needs to prepare for the plastics production until September, the
Reichard Maschinen, GmbH
Issue of the case
Facing the introduction of plastics rings by one competitor, Bruggeman, Reichard Maschinen, GmbH (RMG) needs to decide 1) whether they will start to produce plastic rings and 2) when to start the production, if needed.
1. Incremental cost analysis
For the short run, RM has the following three alternatives. We will propose to limit the time span of this analysis to 6 months and assume there will be no change in capacity to produce rings within this period. We will recommend to evaluate the following three options.
Alternative 1. Sell steel rings which are already in inventory and do not produce steel rings.
(They can continue to sell steel rings for 37 weeks with this inventory.)
Alternative 2. Produce next 34,500 steel rings. (They can sell steel rings for 87 weeks.
)
Alternative 3. Start to produce plastic rings in September.
(Throw away steel raw materials.
)
Incremental cost on alternative 1 (Sell steel rings which are already in inventory and do not produce steel rings.)
Because they will not incur any production cost and the finished goods to be sold are already in inventory, the incremental cost will be $0 as shown in the right table.
One can also point out that the 70% of wages will be incurred during the summer, but it is common to the three alternatives and will not be included in the incremental costs.
Incremental cost on alternative 2 (Produce next 34,500 steel rings.)
With this alternative, RMG can finish the production during the summer slack season. They will incur the direct labor cost in this period and the wages that will additionally paid will be 30% of the regular wages. The variable OH cost is 80% of direct labor costs. The total incremental costs are as shown in the right table.
Incremental cost on alternative 3 (Start to produce plastic rings in September.)
Because RMG needs to prepare for the plastics production until September, the