Case Reichard

REICHARD MASCHINEN,
GMBH
Group 5
Nguyen Thi Thanh Thao - M987Z237
Nong Hong Sa M987Z231
COMPANY PROFILE
Grinding 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 SITUATIONS
At 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 ring
4 times wearing properties
Useful life: 2 months than steel ring
average was four The factory already had a
rings per machine. plastics injection molding

department.
Price: 325/100 the factory could be ready
Big quantity in stock 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 Mr. Hainz Mr. Metz of the
Sales manager Development Headquarter
engineer group
- strongly - plastic ring - no problem
against selling would with GMD
any steel rings completely getting ready to
after the new destroy demand produce plastic
plastic rings for the steel ring rings, although
became - sell the plastic he
available ring only in was sceptical of
-The result Bruggeman's the market
would affect the market area acceptance of
sale of machines - continue such a product
supplying the - expect to
steel ring until recover the
stocks were investment in
used up 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.
What should be
considered?
The concept of eliminating applied
fixed overhead in a short run,
relevant cost analysis.
The concept of sunk costs in a
relevant cost analysis.
The concept of the "product
substitution" aspects of contribution
analysis.
The use of the above analysis as a
numerical framework for a partial
view of the pricing decision.
What should be done?
Mr. Kurtz must decide what to produce
in the future and what to do with his
current inventories. He needs a short-
and a long-term strategy.
Facing the introduction of plastics
rings by one competitor, Bruggeman,
RMG needs to decide:
1) whether they will start to produce
plastic rings
2) when to start the production, if
needed.
Incremental cost analysis
For the short run
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.
Alternative 2:
Produce next 34,500 steel
rings
The special steel used in the manufacture of the rings has already been
purchased and there is no alternative market for the raw steel. Since
the scrap value of the steel used to make the rings is zero, the
opportunity cost of the raw material is also zero. Thus, there is no
further raw material cost
They will incur the direct labor cost in this period and the wages that
will additionally paid will be 30% of the regular wages = 46,8 *30% =
14.04
The variable OH cost is 80% of direct labor costs = 14.04*80% = 11.23
Alternative 3: Start to
produce plastic rings in
September
Because RMG needs to prepare
for the plastics production until
September. For the short run,
we assume no capacity
expansion, so we will exclude
the fixed OH costs estimated
by the controller and include
the additional fixed OH
incurred by the acquisition of
molds and tooling The variable OH cost is 80% of direct
To calculate the additional labor costs = 15.60*80% = 12.48
fixed OH, i. e. molds and The annual demand for the plastic rings:
tooling, we assume the useful Annual demand for the plastic rings
life of this equipment is 5 = 690units/wk * 53wks * 10% =3657
years. One can also assume units
that the demand for the plastic The additional OH cost per 100 plastic
rings will start with 10% of the
current demand for steel rings. Cost per 100 units = (Acquisition
cost/( useful life*annual demand )) *
100 =10,000*100/(5*3657) =$54.69
Question 3:
This question asks for the

differential cost of the 25,450 steel
rings which already are in inventory
at the end of May. The idea here is
to see that the 25,450 finished steel
rings already in inventory have zero
differential cost. No additional work
needs to be done on these rings.
Question 4:This question asks
which ring is more profitable,
steel or
Plastic Rings
plastic.
Contribution Full Cost
Revenue $340.00 $340.00

$4.20
RM $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 Next Future Rings Contribution Full Cost
25,450 34,500 in stock (690 per week X (690 per week X
52 weeks) = 35880 52 weeks) = 35880
Rings
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 25.27 160.89

263.85
Profit $325.00 $299.73 $164.11

$61.15
Total Profit of 82,713 103,500 58,883

Steel Rings 21,941
Volume of 25450/4= 34500/4 = 8625 690*52 = 35880

Plastic Rings 6363 35880
Profit 308 308 308

Contribution of 273.40
100 Plastic
Rings
Total Profit of 19,598 26,565 27,628
Plastic Rings 24,524
Question 4: Cont
1. 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.
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 poses 3 concerns as
below.
Further price reduction
Overhead cost on plastic rings
Demand decrease
Price reduction
Atthe 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 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
Competitive Analysis
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 Maschinens 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

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REICHARD MASCHINEN,

rings per machine. plastics injection molding

Because they will not incur any production cost

This question asks for the

Revenue $340.00 $340.00

OH:Dept. 12.48 31.20 + 15.60

Admin. 15.60 $32.28 $66.60

Profit Contribution $307.72 $273.40

Revenue $325.00 $325.00 $325.00 $325.00

Labor 14.04 46.80 46.80

OH:Dept 11.23 37.44 93.60+ 46.8

Admin. 0 25.27 160.89

Profit $325.00 $299.73 $164.11

Total Profit of 82,713 103,500 58,883

Volume of 25450/4= 34500/4 = 8625 690*52 = 35880

Profit 308 308 308

Atthe very beginning, we can expect high price and

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