Reichard Maschinen: Teaching Commentary

OVERVIEW 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, …

…problem? We sell about 36,000 rings/year If assume we have ~10% SOM , per the case World Market = 360,000 steel rings With Plastic = 90,000 (÷4) plastic rings Plastic Price (within 1 year) $80 (or less) The cost leader is now likely to be a plastics company and cost will be key to price World Market = 90,000 x $80/100 = $72,000 = Tiny! (We sell $112,000 in rings now) Leave this business to the plastics companies (small firms). We can buy easily IS THIS "GOOD THINKING"?