Life of steel rings

2 months

Life of plastic rings Rings per machine Cost of tools to make plastic rings Percent of PWI markets with plastic ring competition Selling price per 100 rings Selling price per ring

8 months 2 to 6 7,500 10% 1,350 13.50

Material Direct Labor Overhead Departmental Admin Total Variable Overhead Fixed Overhead

100 Plastic 1 plastic $ 17.65 $ 0.18 $ 65.50 $ 0.66

$ $

$ $ $ $ $

131.00 $ 65.50 $ 279.65 $ 52.40 $ 144.10 $

1.31 0.66 2.80 0.52 1.44

Cost to manufacture 100 steel $ 1,108 Cost to manufacture 1 steel $ 11.08 Cost to manufacture 100 plastic $ 280 Cost to manufacture 1 plastic $ 2.80 Time to recover value of steel inventory due to cost differential12 months Cost of Inventory of special steel $ 110,900 Book value of inventory of special steel and finished rings $ 390,000

Inventory of steel in terms of rings Sales per week Finished Rings on hand by mid Sept w/o further production Calculation Difference of manuf cost per ring Inventory cost of steel per ring Book value of finished rings Weeks until mid sept Sales of steel rings until mid-sept Current inventory of finished rings

34,500 690 15,100 Cost to buy plastic manuf tooling Material Direct Labor Overhead Departmental Admin

Convert Steel to Rings

Don't convert steel and sell plastic

$ $ $

8.28 3.21 279,100 15 10,350 25,450

$ 111,055.50 $ 67,792.50 $ $ 135,585.00 $ 67,792.50

$ $ $ $ $ $

7,500.00 6,089.25 22,597.50 45,195.00 22,597.50

Total Cost

$ 382,225.50 $ 103,979.25

Calculated cost to manuf 1 steel ring

10.97

Sales

Question 1. What action should Hans Thorborg take? Why? If Thorborg chooses to produce the plastic ring and simultaneously further produce the steel rings from the special steel inventory to minimize the cost of the wasted steel, they will lose the opportunity cost of only producing the high revenue, low cost plastic ring. Tools and Equipment Loss of Special Steel Opportunity cost of not selling steel rings Total Number of Plastic rings to recoup total Payback @ 690 rings sold per week $7,500 $279,100 $36,557 $323,157 23,938 34.69wk

The best solution for Precision would be to cease production of steel rings and immediatley start production of the plastic ring line to recoup cost of unused special steel inventory. If this is done, Precision will recoup the loss of raw steel inventories within 35 weeks @ 690 rings per week sold.

100 Steel 1 steel $ 321.90 $ 3.22 $ 196.50 $ 1.97

$ $

393.00 $ 196.50 $

3.93 1.97

$ 1,107.90 $ 11.08 $ $ 157.20 $ 432.30 $ 1.57 4.32

Tools and Equipment $7,500 Loss of Special $279,100 Steel Opportunity $36,557 cost of not selling steel rings Total $323,157 Number of Plastic 23,938 rings to recoup total Payback @ 690 34.69wk rings sold per week