New Plastic Ring

First of all, I totally agree that the company should process to produce the new plastic ring as the first meeting concluded. I hold this opinion due to two reasons. Firstly, from the market perspective, the plastic ring is more wearable which means it will be much more popular by the market, so if the company does not improve its technology, it will loss the comparative advantage, and finally weed out by the market. Secondly, from the accounting perspective, the gross margin of Plastic Rings is 828.25 (1107.9 – 279.65) larger per hundred units than Steel Rings when these two rings hold the same price ($1350/ hundred). Even through the company need $7500 investment to produce the new ring, the incremental revenue per week is 828.25/100*690 = 5715 dollars. So the company can recover the investment within two weeks.

After determine to produce the new ring, the company has three different opinions:

(1). The company does not produce the Steel Rings further. But they sell the finished Steel Rings in those markets where the competitors do not offer the new rings after mid-September.

(2). The company does not produce the Steel Rings further. And they only sell the new rings in all markets.

(3). The company continues to produce the Steel Rings with the relative lower price during slack periods, and they continue to sell the Steel Rings until the inventories of the old model and the steel both were exhausted.

        Compared opinion (1) and (2), the contribution margin of finished Steel Rings in mid-September is the opportunity cost of  “only sell the new rings in worldwide”, and then the relevant cost between these two opinions are different cost of the two opinions plus the opportunity cost. The inventory of special steel does not make difference between these two opinions, so that is the sunk cost.

The Variable cost of 100 Steel Rings = DM + DL + Variable Overhead = 321.9+ 196.5+ (393* 0.4) = 648.6

The CM of 100 Steel Rings = 1350 – 648.6 = 701.4

The opportunity cost = 701.4/100 * 15100  = 105911.4

        Compared opinion (2) and (3). The contribution margin of finished Steel Rings plus the Gross margin of Steel Rings that were produced with the relative lower price during slack periods are the opportunity cost of  “only sell the new rings in worldwide”.

Here is manufacturing cost of Steel Rings during slack periods: