Capacities Ricoh Machine Sdn Bhd Essay Example

number varied from two to six. Typically, the rings were replaced individually as they became worn-out, and their typical lifespan under normal machine use was approximately two months.

The sales manager inquired about the timeline for when RMSB could supply the new plastic ring and compete with GrinderPte Ltd. The product engineer stated that the factory could be prepared to produce plastic rings by the end of June 2013, but it would require an additional cost of approximately RM15,000 for additional molds and tools specifically designed for this purpose. The product engineering manager expressed concerns about investing in steel ring inventories that would not be used by the end of June. The sales manager disregarded this issue, stating that if the new ring could be produced at a significantly lower cost than steel, the inventory problem was not important.

The steel inventory could be discarded if it couldn't be sold, or sold for any price. According to the sales manager, GrinderPte Ltd was selling the plastic ring for RM350 per hundred, which was RM25 per hundred more expensive than RMSB's steel ring. However, the plastic ring had a lower manufacturing cost. The sales manager urged the company to start manufacturing the new ring promptly, but the managing director believed that this would eliminate demand for the steel ring.

New test results have shown that plastics have approximately four times the lifespan of steel rings. However, due to the high cost of the competitive ring, it was proposed to limit the sale of the plastic ring to the Grinder's market, which was considered a prudent choice. "By doing so, we could likely maintain the supply

of steel rings until all existing stocks are exhausted." The sales manager vehemently disagreed with selling any more steel rings once the new plastic rings were introduced. If customers were to discover that the higher quality plastic rings were only available in certain areas, it would lead to dissatisfaction.

The selling price of machines, which was much higher than that of rings, would be affected by the result. Figures were presented to demonstrate that even if the selling price of both rings were equal at RM325 per hundred, the additional profit from plastic rings, costing RM76.60 per hundred compared to RM273.85 per hundred for steel rings, would exceed the investment in steel inventory in just over a year at current volume levels. Mr. Sayed did not make a decision but agreed to hold another discussion in a week.

In preparation for the meeting, he received cost information from his controller regarding the comparison between plastics and steel rings. The allocation of overhead to all products was based on the direct labor cost. Manufacturing overhead was allocated at double the amount of direct labor, while selling and administration overhead was allocated at the same amount as direct labor.

The controller predicts that the only variable overhead costs for ring production would be the payroll taxes and benefits associated with direct labor, which accounts for about 80% of labor costs. The product engineer has discovered that there is enough raw steel inventory to make approximately 35,000 additional rings. If sales continue at the current rate of 700 rings per week, there will be 5,000 finished rings left by June 2013 without any further production. The company

is currently operating at full capacity and has access to casual labor as needed.

1. What is the incremental cost to produce 100 plastic rings?
2. What is the incremental cost, per 100 rings, to produce the next 10,300 steel rings?
3. What is the incremental cost of the 50,000 steel rings which are already in inventory as at 15th January 2013?
4. Which is more profitable, the steel rings or the plastic rings? Be prepared to show the calculations which support your answer.
5. What action do you recommend to Mr. Sayed and assess the likely impact of your recommendation, both quantitatively and qualitatively?