Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 4 pages in length and its case teaching package is 10 pages.

Abstract

This case is set in Western Europe in 1974, just after the Arab oil shocks of 1972 and 1973. National borders were still very important business barriers. But, the concept of open trade borders (EC-1992) was beginning to grow.

This case deals with cost analysis for assessing the economics of a product transition facing Reichard Maschinen, but it 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. At another level, when the marketing and manufacturing issues are considered, the complexity of the decision becomes apparent. Financial signals say that steel rings are more profitable; marketing signals say that the future belongs to plastic rings; manufacturing signals say we should perhaps "buy" rather than "make." 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 price?"

Linkages to Textbooks or Journal Articles/Fit Within a Course

The case is a very good classroom vehicle for illustrating several different layers of sophistication in terms of relevant cost analysis. The following issues and concepts are likely to arise during classroom discussion.

1. The concept of eliminating applied fixed overhead in a short run, relevant cost analysis.
2. The concept of sunk costs in a relevant cost analysis.
3. The concept of the "product substitution" aspects of contribution analysis.
4. The use of the above analysis as a numerical framework for a partial view of the pricing decision.

This case teaches very well early in the required managerial accounting course in the first year of the MBA program. This case can be comprehensively covered in one 90-minute class period.

Study Questions

1. What is the "differential" or "incremental" cost to produce 100 plastic rings?
2. What is the "incremental" cost, per 100 rings, to produce the next 34,500 steel rings?
3. What is the "differential" cost of the 24,450 steel rings which are already in inventory at the end of May?
4. Which is more profitable: the steel rings or the plastic rings? Be prepared to show the calculations which support your answer.
5. What actions do you recommend to Mr. Kurtz regarding
   • manufacture of plastic rings
   • further manufacture of steel rings
   • pricing of steel and plastic rings
   • availability of steel and plastic rings over the next 1 to 2 years
   • longer-run availability and pricing of steel and plastic rings
6. Assess the likely impact of your recommendations, both quantitatively and qualitatively.

The downloadable file for this case is in Microsoft® Word 7.0 for Windows®.

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