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Industrial Grinders N.V.

Industrial Grinder, was decide to start produces and selling a plastic ring for used in their
machines. These plastic rings will serve the same purpose as the steel rings in Industrial
Grinders manufactures. However, they cost less to manufacture and they last longer.
Management has decided that Industrial Grinders will now start to manufacture plastic rings.
General Manager of the German plant, is tasked with deciding whether or not he should scrap a
large quantity of steel, manufacture and sell both steel and plastic rings or continue to
manufacture and sell steel until their stock of steel is depleted.
Industrial Grinders have inventory on hand valued at $93,000, made up of special steel
worth $26,400 and manufactured steel rings valued at $66,600. Steel rings have a normal life of
about two-months. Industrial Grinders is a well-established company and has been around
nearly 70 years. Plastic Rings have recently been introduced to the market by a French firm,
Henri Poulenc. The new rings have four times the wearing properties of the steel ring, and can
be manufactured at a lower cost. It is expected that the plastic rings would not be produced by
any other company other than Henri Poulenc for some time, and this meant that no more than
10% of Industrial Grinders market would be affected. Poulenc is our strongest competitor in the
French market. Development engineer estimates that plastic rings could be produced in three
and a half months, with the necessary tools and equipment obtained for about $1,800. The next
two or three months the plant would not be operating at capacity; during slack periods, the
company had a policy of employing excess labor on various make-work projects rather than
laying the men off. This time could possibly be used to convert the steel inventory into rings.
1. Should produce a plastic rings as soon as possible?
Industrial Grinders could prepare to manufacture the plastic rings as soon as possible
but, continue to sell the steel until the plastic is ready, and then just start to sell plastic in
their entire market. And if any customers do not like a plastic than, offer them steel at a
reduced cost. That may under 50,000 steel rings will to sell. During that time frame it
would be reasonable to expect that plastic rings would be manufactured as the standard
ring by not only manufactory but our competitors, therefore eliminating the demand for
steel ring. We also should take into account that our plastic ring sales of 69 per week in
France would mean additional time needed to exhaust our steel ring sales. The special
steel in inventory would be manufactured into steel rings. Industrial Grinders are able to
employ excess labor at 70%. This will reduce the labor cost and some of the indirect
expenses that are directly related to labor costs, therefore creating a higher profit on the
recently manufactured steel rings. This savings would allow us the flexibility to offer a
discount on the sales price of the steel rings to our customers. We could phase in the
process of preparing our machines to start making the plastic rings. We would need to
invest $1,800 for the necessary tools and equipment to start producing the plastic rings.
During the next 6 months we should begin marketing the plastic rings and educate our
customers on the improved benefits of the plastic rings.
2. What should be the price point for steel ring?
Manufacture the remaining stock. The cost would be $64,584.00 ($263.85 to
manufacture 100 rings, minus the $76.65 material costs as the steel is already
purchased, times the 345 batches the remaining stock will make). Scrap the remaining
un-manufactured stock and move straight on to manufacturing plastic rings. This would
cost $26,400. Manufacture the remaining stock, selling it in 90% of their usual markets,

but sell the plastic rings in the market where the competitors rings are being sold. This
would cost the $64,584.00 previously mentioned, but there is a risk of current customers
finding out about the plastic option not mentioned to them. This is not measurable, but it
does need to be considered. Manufacture the steel, sell it in 90% of their markets at a
reduced cost (keep sales rats are current rate (690 ring per week) we should reprised
steel rings as of plastic rings ( * 320.40 = $ 80.1 per 100 ring)). While also offering
plastic rings. Im not sure that would be great, but it could help recoup some of the cost
of manufacturing. And if word did get out about the plastic rings, it could be offered to
appease any angered customers. However, offering them a better product at the same
price might anger them even more than merely finding out about it to begin with.
To help to decide which option to choose we need to calculate the Profits of each option.
1- Keep selling the steel rings until the mid of September and start selling the plastic
ones after that. (Producing Steel Rings)
Material
Direct Labor
Departmental Cost
Administrative
Total Cost
Selling Price
Profits(Loss)

76.65
46.8
93.6
46.8
263.85
80.1
183.75

2- Continue producing steel rings as long as he still has steel in his inventory and switch
to producing the plastic ones after that. (Produce Plastic Rings)
Material
Direct Labor
Departmental
Cost
Administrative
Total Cost
Selling Price
Profits

4.2
15.6
31.2
15.6
66.6
320.4
253.8

3-Sell all the finished steel rings and start selling the plastic ones after that. (Sell the
Available Steel Rings)
Total Cost
0
Selling Price
80.1
Profits
80.1
(Selling the available finished steel rings will bring income of 80.1 per each one hundred
rings and this is less than what the company can make if it produces and sells the plastic
rings)
3. Should Industrial Grinders employ the cheap German labor?

If Industrial Grinders start produce the plastic ring, before the first product come out,
Industrial Grinders will have 25,242 finish steel ring on hand and about 11,829 steel ring
will be sold in current rate of 690 per week. However, if Industrial Grinders decide to not
lay off their employee and employ them at 70% regular wages and produce steel ring to
keep their employee, cost per unit will drop from $2.634 to 2.077 and number of steel
ring to be produce will become 12,712. Whatever the total book value of the special
scrap and steel rings will be $61,790 including $35,390 leftover and 26,400 special steel
on hand. In this case we offer $61,790 as sunk cost.
4. Which is more important to Industrial Grinders: selling rings or selling machines?
Inventory Book value

$93,000
Lo

Machine unit price


Ring usage per machine
Average life of a ring
Annual ring turnover
# of rings per year per machine
Price per 100 Rings
Price per Ring
Estimated Ring Revenue per machine
Est. Ring Rev as a % of Machine price

Hi
$4,500

$6,820

2
2
6

6
2
6

12

36

320.4
3.204

320.4
3.204

38.45
0.85%

115.34
1.69%

Given the small %, rings are not nearly as important as machines!


From table
Steel ring revenue as percentage of machine selling price range between 0.85%
to 1.65%. The ring could often use as similar as machines. However, the estimate did
not consider selling extra ring that was use by competitors machines. This information
given and this estimate can tell that selling rings are not important as selling machine.
Recommendation
Industrial Grinders should begin selling the plastic rings, which have a much
lower cost to produce as shown in Table A, sooner than if they were to manufacture the
special steel on hand. The plastic rings will most likely be the preferred product for the
customers before the steel rings that may not get sold. Keeping the current inventory of
steel rings allows them to satisfy their customers that may take a while to convert to the
plastic ring. Producing plastic rings will allow Industrial Grinders to keep their employee
moral up by not asking them to produce steel rings at a reduced labor but would be able
to focus their efforts in making sure they are ready to manufacture plastic rings.
Producing the plastic rings sooner, would allow Industrial Grinders to introduce the

product to all of their markets, much of which is outside the area where French firm,
Henri Poulenc has already introduce the rings, therefore increasing our market share.
Relevant Costs and Revenue can be applied directly to this case. In the
discussion of whether revenues and costs were relevant, whether a cost or revenue is
relevant or irrelevant unless a decision has been specified and in order to perform a
correct economic analysis of a decision problem you must identify and include all
relevant revenues and cost, therefore determining the effects of our decision choice on
cash. In preparation for writing this paper, before reading Relevant Costs and Revenue.
It is also true that the plastic rings will be a substitution product for the steel rings
because plastic will be sales of the steel market. Therefore, as shown in Table E,
increasing their contribution margin to $198,803 for plastic rings compared to $83,531
for steel rings. This concept to the failure tolerant leader readings. After introduction of
the plastic rings to our markets, there are times when considering the opportunity costs
should also be taken into account.

Given all the costs of production in table A: The management knows the demand on the rings
for the existing (i.e. sold) machines, they have to make a decision based on the scenarion that
will first of all minimize the losses, satisfy customers and keep up with the competition.

Plastic
rings/100

Steel rings/100

New production of
steel rings at 70%
labor/100

Table A
Material
Direct Labor
Departmental
Administrative
Total

Profit=Sale price-cost

4.2
15.6
31.2
15.6
66.6

253.8

76.65
46.8
93.6
46.8
263.85

76.65
32.76
65.52
32.76
207.69

112.71

Table B is basically the calculations of 2 scenarios - profit that INDUSTRIAL GRINDERS would
make if the sell the steel rings based on the demand 690/week, OR profit that INDUSTRIAL

GRINDERS would make selling the plastic rings (given that for every plastic ring they could sell
4 steel rings
Table B
Price
320.4
320.4

Revenue
3,095,064
773,766

Profit

(Ideal scenario)
OR

First 14 Weeks
Quantity
Steel
9,660
Plastic
2,415

Cost
320.4
320.4

Revenue
4,838,040
1,209,510

Profit

Ideal Scenario
OR

Next 22 Weeks
Quantity
Steel
15,100
Plastic
3,775
Profit from steel rings
profit from Plastic rings

3,095,064
612,927

1,701,921
958,095
4,796,985
1,571,022

Table C shows various scenarious of how INDUSTRIAL GRINDERS could cover the demand
for rings - since for every plastic rings they might have sold 4 steel rings their profit will vary
depending of which option they will chose (please see the interdependent formula).
TABLE C:
First 14 Weeks
Quantity
Steel
Plastic

9,660

Profit

250
750

Next 22 Weeks
Quantity
Steel
Plastic

Price

15,100
-

Cost
275
825

Revenue

Profit

2,415,000
-

2,415,000

Revenue

Profit

4,152,500
-

1,016,381

3,431,381

In Table C we changed the price for the following reason:


If INDUSTRIAL GRINDERS was operating in the ideal world without competition they
could keep selling the steel rings until they run out of the inventory at the same price. But
considering that they have competition that INDUSTRIAL GRINDERS has to keep up with, they
also do not want to piss off their customers, because sooner or later they will see the difference
in the operating life of plastic VS steel ring and ask why they are being sold at the same price.
Keeping that in mind I would suggest to management the following scenario: from the
profitability point of view they should take advantage of 70% labor cost and use them to produce
the steel rings from the remaining inventory. We can say that even knowing that the competition

starts selling plastic rings it will only affect 10% of INDUSTRIAL GRINDERS market, so for the
first 14 weeks they should keep selling existing rings at $320.40. The reasons for that - the
company is reliable, customers know them, plus it will take time for news to spread. So there is
no reason to start welling rings at cheaper price before mid-September.
Starting the mid-September we can reconsider the pricing policy and while taking
advantage of 70% labor that produces the steel rings from existing steel inventory, we also dont
have to pay or materials. So at this point we can lower the price for steel rings, keep selling
them AND start selling the plastic rings. But this is the time to decrease the price for steel rings
and increase the price for plastic. Management knows their customers and the whole market
situation, so since the competition still can affect 10% of INDUSTRIAL GRINDERSs market, it
will not happen overnight. Also INDUSTRIAL GRINDERS has a good name on the industry. I
would suggest that the price for plastic rings is 2-3 times more that the price at which they sell
steel rings (ex if they sell steel rings at$275, they can try selling plastic rings at $825). This way
they win from all points: they get rid of the inventory of steel they keep their positions on the
market as reliable AND flexible company.
Id like to point out that the price at which Management chooses to sell rings starting
Mid-September depends on many factors - competition, changing market, demand etc. The
strategy can be adjusted based on the current circumstances. In my opinion the strategy that I
have suggested will bring the best outcomes for INDUSTRIAL GRINDERS.

Table D
Variable Cost
Material
Direct Labor
Departmental Variable
Total Variable
Table E
Volume at
Per Unit CM
Revenue
Variable costs
Weekly Sales
Contribution Margin

100 Plastic
100 Steel
Rings
Rings
$4.20
$76.65
15.60
46.80
12.48
37.44
$32.28
$160.89

690
100 Plastic
100 Steel
12% discount on revenue100
Rings
Rings
Plastic Rings
$320.40
$281.95
$320.40
32.28
160.89
32.28
173
690
690
$49,700
$83,531
$198,803