Sunteți pe pagina 1din 3

\

Ringo Rag Company

9eq,

2

The settingfor this case is Columbus, Ohio in the early t950s. The numbers in the case have not been updated because there is no way to do so without changing

one or more of the interrelationships which make the case so useful pedagogical standpoint. In tackling the case, keep in mind that when

from a

it was

"current," an hourly wage of $1.10 was reasonable and a new Cadillac soldfor $4,000. In terms of the managerial issues involved, it is still an excellent casefor

the 2000s.

The Ringo Rag Company purchases scrap cotton fabric which is then converted into handy cleaning

rags in usable sizes, after it is cleaned and graded. Main customers for these rags are garages, service

stations, factoiies, and machine shops. The company buys its rags from three sources: textile

converters, commercial laundries, and junk dealers.

The production process for the company is not complicated. First, rags purchased from junk

dealers are washed and dried in special heavy duty machines. The cleaned rags and those purchased

from laundries, which are already washed, move next to the grading department. Here, each rag is inspected and graded according to its absorption ability as either A, B, or C quality, with A as the best grade. Textile converters sell their "spoils" (rags) clean and already graded. Next, the rags are cut into

squares of about I to I l/2 feet. At the same time, any attached items such as buttons, metal ornaments, or snaps are removed. Rags purchased from textile converters do not have anything attached to them.

Pieces of material which are too small for further cutting or contain holes or are not usable for any

other reason are bumed. The cut rags are then packaged in 5, 10,20, and 50 pound cartons.

Selling prices are as follows (quoted FOB warehouse):

Carton Size

Oualitv

stb

t0 lb

20 lb

s0 th

c

$.70

$ 1.30

$2.40

$5.00

B

;t5

1,40

2,60

5.50

A

.90

1.70

3.20

7.00

Raw material costs vary by source. Textile converters charge $6.00, $5.00, and $4.00 per cwt

(hundred weight) for grades A, B, and C, respectively. Twenty percent of the weight purchased is lost

as waste during the cutting process, This is referred to as "loss factor." Last month, the following

quantities were purchased from textile converters:

Grade A

43,750 lb

Grade B

25,000 lb

Grade C

6,250 lb

Although each purchase was a little different, the company usually had to agree to take

some quantity of C grade fabric when it bought A grade fabric.

fi$

dg

l:

+i

i,l

,ti

ili

ir

222

Laundries charge $3.00 per cwt. Past experience

indicates a33.33o/o loss factor. The yield ratio of material

from the laundries is typically about l/4 gtade A, lD

grade B, and ll4 grade C. Last month, fungo purchased

60,000 pounds of material from laundries.

The highest

loss factor is incurred from material

junk dealers, where it amounts to 50%.

purchased from

fn" 3rrt dealersi price for material is $ I -00 per cwt' Last

month, the company purchased 50,000 Pqunds

source. ThiC uhgraited material usually

from this

yields about l/5

gade A, 2t5 grade B, and 2/5 grade C rags. For the rags

purchased

the

from junk dealers and laundries, about half of

overall loss occurs in grading and about half in

cutting.

The company employs

twenty-five women in 3

women is paid $l'10 per

departments. Each of these

hour. Last month's time cards indicate that their time was

spent as follows:

Grading

Cutting

Packing

Total

1,000 hrs

3,000 hrs.

600 hrs.

*.000Jus,

Last month's production and sales (cleaned, cut,

and boxed), in pounds, was:

Grade A

Crade B

Grade C

Total

Produced

50,000

50,000

25.000

u50ag

Sold

Pounds

50,000

50,000

25.000

S

7,750

6,500

3.125

125-000 11-T15

All sales ars local, and orders are received by phone or

mail.

Last month's production activities, sources of

materials, prices, costs, and yields are representative of

normal opirations. Sales usually follow production very

closely, with very

Two

little seasonal fluctuation'

foremen are employed by the company,

each paid $7,500 per year. Both are nephews of Mr'

One-fourth of their time is spent loading and

unloading the washers and dryers. Another quarter bf

Ringo.

their time is spent moving

The two

packed boxes to the loading

shipment. The balance of their

zone of the building for

time is spent supervising

rvasher and dryer sets owned by the

company are depreciated over 5 years on a straight-line

basis. Each set has a capacity of 100 pounds per load and

and checking the women'

can cycle

Expenses other than raw material and labor for a typical year are as follows:

about l6 loads during a working day'

Depreciation

$3,060

Natural Gas

600

Electricity

480

Rent

Detergent (for the

washers)

Bookkeeper/

Secretary

3,200

1,000

4,100

Gasoline and Oil

(for cars)

Travel

(Lodging

and Meals)

400

6,000

Packing cartons 7,204

Miscellaneous

Expenses

1,200

($760 washer and

$300 cutting

tables; $2,000 for

carsa).

,t

(Used for the (3/4 is atributable,tii

washers and dryers;

to cutting)

(Leased buildingb)

(about $.01 per

(Half for

for selling)

(5 and I0 lb. boxes t

$.07 each, and 20

50 lb. boxes at $.10

aOne car is used in selling,

bThe building

unprocessed

is used

the other in purchasing.

as fotlows: ll4 for

rags (average about I month's

ll4 for storing boxed rags (about one month's

for cutting, and l/8 each for grading and

room used as an office is not counted in the

The company is organized as a

between Mr. James Ringo, who acts as purchasing

and president, and Mr. John Wall who handles all

gefoie forming their partnership 6 years ago, Mr,

was purchasing manager for a paper mitl which

fine rag-content papers. Mr. Wall had been

for waste products sales for a large clothing manufi

This case was written as part of a student to provide cost anatysis and business advice [o

company. Mr. Ringo said he agreed to the pi

because he had no formal cost accounting records i

He said he and Mr. Wall ran the business pretty

their intuition and they

might be more profitable

often wondered whether'

i:

ways to do things.

For eiample, Mr. 'ivall had asked him onct

he bothered to sort the junk rags at all since alrnost t them are C grade anyway. He didn't really have d

answer, and the question had led him to wonder

he shouldn't perhaps drop the junk source

/

I

the washer/dryers wore out in a few years. He liked the

idea of having several sources for raw material so he

could shop around to keep his purchase prices low, but he

couldn't prove to himself whether he was buying the right

mix.

He and Mr. Wall had built up a good set of

steady customers oyer the years with good service and good quality at competitive prices. But they had no idea which products were most profitable.

QUESTTONS

-.- -

Your frst fask is to calculate "contribution margin" and "full cost profit" for each of the 5 different purchasing

sources (Junk, Laundry, Tex A,.Tex B, and Tex C). We

suggest you start as follows:

l.

2.

Calculate average revenue per pound, by grade.

Calculate weighted average revenue per pound for

each ofthe five purchasing sounces.

3, Calculate raw material cost per pound sold, for each

source.

4. Calculate direct tabor cost per pound sold for:

a. grading i

b.

cutting !

considcr vields carefull-v

5. Calculate packing cost (labor and material) per pound

s9ld.

6. Calculate variablc overhead per pound sold for the

'l

.

junk source.

ltems I to 6 represent profit contribution by

purchasing source.

E. Assign fxcd overhead costs to each of the five

.

purchasing sources:

first, assign specific costs to the Junk source;

then assigrr all other overhead equally across all

5 sources; then divide by pounds sold to get fixed overhead

perpound.

9. Item 7 less item 8 represents full cost profit by

source.

Now, what does this have to do with the

management issues? Specifically:

l.

2.

3.

4.

5.

How close is the company to an optimal sourcing

mix?? ,

Can you calculate profitability by grade? Is this

information useful?

What is your recommendation regarding

selling all

cleaned, cut and packaged junk rags as C grade,

without sorting?

What other recommendations do you have for Mr.

Ringo?

As an overall assessment, is this business in serious

need ofyour help, or not?

estimute ROA (Return On Assets) for

the business? t

Hint: Can you