Submitted by: Submitted by kmaddx
Views: 724
Words: 348
Pages: 2
Category: Business and Industry
Date Submitted: 08/10/2010 02:58 PM
The decision to convert to plastic rings is a simple one. The incremental analysis of steel rings vs. plastic rings shows an $828.25 cost savings per 100 rings. The costs associated with the rings in inventory and the steel in inventory are not relevant to this decision as these costs are sunk costs. However, Thorborg’s management expects him to make good use of the remaining steel and to sale the remaining inventory of steel rings. Thorborg should use the excess steel to manufacture rings using the reduced cost labor. The rings can be produced at a cost of $872.10 per 100 as compared to the regular costs of $1,107.90 per 100. Precision Worldwide, Inc. can then reduce the selling price for steel rings when the plastic ring production comes online. The steel rings can be sold at a price equal to the regular total production cost ($1,107.90). The rings produced using reduced labor costs will generate a profit $235.80 and the rings produced using full-price labor will be sold at a price that recovers Precision Worldwide, Inc. costs. The average profit per 100 rings for the sale of the rings is $164.01. Precision Worldwide, Inc. can offer the steel rings and the plastic rings to their customers simultaneously. The reduction in price for the steel rings will allow Precision Worldwide, Inc. to make a profit without eroding the trust they have developed with their customer base.
100 Plastic Rings 100 Steel Rings 100 Steel Rings (rlc)
Revenue $ 1,350.00 $ 1,350.00 $ 1,107.90
Total Cost $ 279.65 $ 1,107.90 $ 872.10
Profit $ 1,070.35 $ 242.10 $ 235.80
100 Steel Rings (reduced labor costs)
Material $ 321.90
Direct Labor $ 137.55
Overhead
Departmental $ 275.10
Administrative $ 137.55
Total $...