Industrial Grinders During the term, we had a case study, Industrial Grinders, w
ID: 1113292 • Letter: I
Question
Industrial Grinders During the term, we had a case study, Industrial Grinders, which focused on Sunk and Opportunity Costs. Please refer to the table below, which comes from data in the Industrial Grinders case Competitor 100 Plastic Rings Industrial Grinders 100 Steel Rings (Finished) Industrial Grinders 100 Steel Rings (Unfinished or Specialized Steel) Selling Price $320.40 $320.40 Costs Direct Material $4.20 $76.65 Direct Labor 15.60 46.80 Overhead Departmental 31.20 93.60 Administrative 15.60 46.80 Total Manufacturing Costs $66.60 $263.85 Regarding the Overhead costs, these are allocated based on Direct Labor; The Variable Overhead costs are 80% of the Direct Labor amount, and relate to the benefits for the labor force. As you recall from the case, Industrial Grinders has the opportunity to hire the German Labor Force at a rate of 70% of the normal rate. What would be the RELEVANT costs for Decision-Making to produce the UNFINISHED (or Specialized Steel) to FINISHED steel? Please indicate your answers in the YELLOW boxes above. Also, what PRICE POINT would the customer expect to see for the Steel Rings given that the Competitors Plastic Rings last FOUR times as long? Please indicate in the YELLOW BOX in Cell E9. Lastly, briefly comment on whether it would be cheaper to produce the Plastic Rings or to hire the German Labor from a RELEVANT COST perspective. No more than two sentences are required. Industrial Grinders During the term, we had a case study, Industrial Grinders, which focused on Sunk and Opportunity Costs. Please refer to the table below, which comes from data in the Industrial Grinders case Competitor 100 Plastic Rings Industrial Grinders 100 Steel Rings (Finished) Industrial Grinders 100 Steel Rings (Unfinished or Specialized Steel) Selling Price $320.40 $320.40 Costs Direct Material $4.20 $76.65 Direct Labor 15.60 46.80 Overhead Departmental 31.20 93.60 Administrative 15.60 46.80 Total Manufacturing Costs $66.60 $263.85 Regarding the Overhead costs, these are allocated based on Direct Labor; The Variable Overhead costs are 80% of the Direct Labor amount, and relate to the benefits for the labor force. As you recall from the case, Industrial Grinders has the opportunity to hire the German Labor Force at a rate of 70% of the normal rate. What would be the RELEVANT costs for Decision-Making to produce the UNFINISHED (or Specialized Steel) to FINISHED steel? Please indicate your answers in the YELLOW boxes above. Also, what PRICE POINT would the customer expect to see for the Steel Rings given that the Competitors Plastic Rings last FOUR times as long? Please indicate in the YELLOW BOX in Cell E9. Lastly, briefly comment on whether it would be cheaper to produce the Plastic Rings or to hire the German Labor from a RELEVANT COST perspective. No more than two sentences are required.Explanation / Answer
if German labour is used direct labour and variable overhead costs will reduce. This will increase the profitability for 100 rings by about 30 dollars. Cost will decrease, therefore, the organization can reduce the prices for the consumer.
The profits though on plastic rings are high even if German labour force is used. This is because material cost is nearly 18 times for steel. Cost for labour is 3 times, for overheads is 2.5 times.
From a consumer's point of view, steel rings are better for short term use if the price is lower. This can be achieved by lowering the sales price through reduction of labour cost, overheads or materials cost. With German labour force, this can be achieved. But, for a consumer looking for a product that lasts long, reduction in cost of labour to reduce selling price is unlikely to be enough.
If Steel Rings last for an year, plastic rings last for 4. Taking into account the expenditure per year, the selling price of $320.4 would lead to a value of $80.1 per year. Taking currency value and inflation into account, this price per year will increase in the subsequent years. Steel riings therefore need to be priced $80.1 or lower.
From the manufacturer's point of view, German labour will bring in profitability.
100 Plastic Rings
100 Steel Rings
Variable overhead cost
0.8*direct labour cost
12.48
37.44
German Labour
0.7* the expenditure on normal labour force
10.92
32.76
Variable overhead cost for German labour
0.8*direct labour cost
8.736
26.208
Relevant Costs for decision making
Competitor 100 Plastic Rings
Industrial Grinders 100 Steel Rings (Finished)
Selling Price
$320.40
$320.40
Costs
Direct Material
$4.20
$76.65
Direct Labor
15.60
46.80
Overhead
Departmental
31.20
93.60
Administrative
15.60
46.80
Total Manufacturing Costs
$66.60
$263.85
Profit = S.P. - Costs
253.8
56.6
Pricepoint for steel rings using German labour given that plastic rings last four times as long
285.768
Cheaper to produce plastic rings or to produce German labour
Plastic rings
100 Plastic Rings
100 Steel Rings
Variable overhead cost
0.8*direct labour cost
12.48
37.44
German Labour
0.7* the expenditure on normal labour force
10.92
32.76
Variable overhead cost for German labour
0.8*direct labour cost
8.736
26.208
Relevant Costs for decision making
Competitor 100 Plastic Rings
Industrial Grinders 100 Steel Rings (Finished)
Selling Price
$320.40
$320.40
Costs
Direct Material
$4.20
$76.65
Direct Labor
15.60
46.80
Overhead
Departmental
31.20
93.60
Administrative
15.60
46.80
Total Manufacturing Costs
$66.60
$263.85
Profit = S.P. - Costs
253.8
56.6
Pricepoint for steel rings using German labour given that plastic rings last four times as long
285.768
Cheaper to produce plastic rings or to produce German labour
Plastic rings