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,

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

Steel ring

Plastic ring
4

times wearing properties

than steel ring

The

factory already had a

plastics injection molding
department.

Useful

life: 2 months
average was four
rings per machine.
Price: 325/100
Big quantity in stock

the factory could be ready

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
Sales manager

Mr. Hainz
Development
engineer

Mr. Metz of the

Headquarter
group

- strongly
against selling
any steel rings
after the new
plastic rings
became
available
-The result
would affect the
sale of machines

- plastic ring
would
completely
destroy demand
for the steel ring
- sell the plastic
ring only in
Bruggeman's
market area
- continue
supplying the
steel ring until
stocks were
used up

- no problem
with GMD
getting ready to
produce plastic
rings, although
he
was sceptical of
the market
acceptance of
such a product
- expect to
recover the
investment in
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.

Apa yang harus

dipertimbangkan?
Konsep

eliminasi overhead tetap yang

diterapkan pada jangka pendek, biaya
relevan.
Konsep biaya yang sudah terjadi (sunk
cost) dalam analisis biaya relevan.
Konsep dari aspek produk substitusi
dari analisis kontribusi.
Penggunaan analisis di atas sebagai
kerangka numerik sebagai pandangan
dari keputusan harga.

Apa yang harus

dilakukan?
Mr.

Kurtz harus memutuskan apa yang

harus diproduksi di masa depan dan apa
yang dilakukan dengan persediaan yang
ada saat ini. Dia memerlukan strategi
jangka pendek dan jangka panjang.
Menghadapi pengenalan cincin plastik oleh
salah satu kompetitor, Bruggeman, RMG
perlu untuk memutuskan:
1) apakah mereka akan memulai
memproduksi cincin plastik?
2) Kapan produksi tersebut dimulai, jika
diperlukan.

Analisis Biaya Inkremental untuk

Keputusan Jangka Pendek
Alternative 1: Menjual cincin baja yang ada
dalam persediaan dan tidak memproduksi lagi
cincin baja. (Mereka dapat melanjutkan
penjualan sampai 37 minggu ke depan)

Alternative 2. Memproduksi 34,500 cincin baja.

(Mereka dapat menjualnya dalam waktu 87
minggu)

Alternative 3. Memulai memproduksi cincin

plastik di bulan September. (dengan membuang
baja mentah)

Alternative 1:

Menjual cincin baja

yang ada dalam persediaan dan
tidak memproduksi lagi cincin baja.
Biaya Inkremental per 100 cincin
Bahan Baku

$0.00

TKL

$0.00

OH variabel

$0.00

Total

$0.00

Karena mereka tidak akan menimbulkan biaya

produksi dan barang jadi yang akan dijual sudah
dalam persediaan, biaya inkremental akan
menjadi $ 0 seperti yang ditampilkan pada tabel
di atas.

Alternative 2:
Memproduksi 34,500 cincin baja
Biaya Inkremental per 100 cincin
Bahan Baku

Baja

$0.00

TKL

$14.04

OH variabel

$11.23

Total

$25.27

khusus yang digunakan dalam pembuatan cincin telah dibeli dan tidak
ada pasar alternatif untuk baja mentah. tersebut Karena nilai skrap dari baja
yang digunakan untuk membuat cincin adalah nol, biaya kesempatan dari
bahan baku juga nol. Dengan demikian, tidak ada biaya bahan baku lanjut.
Mereka akan dikenakan biaya tenaga kerja langsung dalam periode ini dan
upah yang akan dibayarkan yakni 30% dari upah reguler = 46.8 x 30% =
14.04
Biaya OH variabel adalah 80% dari biaya tenaga kerja langsung = 14.04 x 80%
= 11.23

Alternative 3: Memulai
memproduksi cincin plastik di
bulan September

Karena RMG perlu

mempersiapkan produksi
plastik sampai September.
Untuk jangka pendek, kami
menganggap tidak ada
ekspansi kapasitas, jadi kami
akan mengecualikan biaya
OH tetap diperkirakan oleh
controller dan termasuk OH
tetap tambahan yang terjadi
dengan perolehan cetakan
dan peralatan.
Untuk menghitung OH tetap
tambahan, i. e. cetakan dan
tooling, kita asumsikan masa
manfaat peralatan ini adalah
5 tahun. Satu juga dapat
mengasumsikan bahwa

Biaya Inkremental per 100

cincin
Bahan Baku

$4.20

TKL

$15.60

OH variabel

$12.48

Tambahan OH
tetap

$54.69

Biaya
dari
Total OH variabel adalah 80%
$86.97
biaya tenaga kerja langsung =
15.60 x 80% = 12.48
Permintaan tahunan untuk cincin
plastik= 690 unit / minggu *
53minggu * 10% = 3.657 unit
Biaya tambahan OH per 100 plastik
Biaya per 100 unit = (Akuisisi
biaya / (masa manfaat * permintaan
tahunan)) * 100 = 10.000 * 100 / (5
* 3657) = $ 54,69

Question 3:
Pertanyaan

ini meminta biaya

diferensial dari 25.450 cincin baja
yang sudah berada dalam
persediaan pada akhir Mei. Idenya
di sini adalah untuk melihat bahwa
25.450 cincin baja sudah selesai
dalam persediaan memiliki biaya
diferensial nol. Tidak ada
pekerjaan tambahan yang perlu
dilakukan pada cincin tersebut.

Question 4:This question asks which

ring is more profitable, steel or plastic.
Plastic Rings

Contribution

Full Cost

Revenue

$340.00

$340.00

RM

$4.20

$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
25,450

Next Future Rings

34,500 in stock
Rings

Contribution
(690 per week X
52 weeks) =
35880

Full Cost
(690 per week X
52 weeks) = 35880
$325.00

Revenue

$325.00

$325.00

$325.00

RM

76.65

76.65

Labor

14.04

46.80

46.80

OH:Dept

11.23

37.44

93.60+ 46.8

Admin.

25.27

160.89

263.85

Profit

$325.00

$299.73

$164.11

$61.15

Total Profit of
Steel Rings

82,713

103,500

58,883

21,941

Volume of
Plastic Rings

25450/4=
6363

34500/4 = 8625

690*52 = 35880

35880

Profit
Contribution of
100 Plastic
Rings

308

308

308

273.40

Total Profit of
Plastic Rings

19,598

26,565

110,510

98,096

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 concerns as below.
Further price reduction
Demand decrease

Price reduction

At

the 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 Analysis

Competitive

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