Need Questions 6. 7. 8. and 9.

Ringo Rag Company The setting for this case is Columbus, Ohio in the early 1950s. 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 from a pedagogical standpoint. In tackling the case, keep in mind that when it was "current, " an hourly wage of $1.10 was reasonable and a new Cadillac sold for the 2000s. $4,000. In terms of the managerial issues involved, it is still an excellent case for 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, factories, 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 1 to 1 1/2 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 burned. The cut rags are then packaged in 5, 10, 20, and 50 pound cartons. Selling prices are as follows (quoted FOB warehouse): Carton Size Quality 5 1b 10 1b 20 1b 50 1b $.70 $1.30 $2.40 $5.00 .75 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 1b Grade B 25,000 1b Grade C 6,250 1b 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.222 Laundries charge $3.00 per cwt. Past experience indicates a 33.33% loss factor. The yield ratio of material Depreciation $3,060 ($760 washer and dryer; from the laundries is typically about 1/4 grade A, 1/2 $300 cutting machines and grade B, and 1/4 grade C. Last month, Ringo purchased tables; $2,000 for two carsa) 60,000 pounds of material from laundries. The highest loss factor is incurred from material Natural Gas 500 (Used for the dryers) 480 purchased from junk dealers, where it amounts to 50%. Electricity (3/4 is attributable to the The junk dealers' price for material is $1.00 per cwt. Last washers and dryers, 1/4 month, the company purchased 50,000 pounds from this to cutting) source. This ungraded material usually yields about 1/5 Rent 3,200 (Leased buildingb) grade A, 2/5 grade B, and 2/5 grade C rags. For the rags Detergent (for the purchased from junk dealers and laundries, about half of washers) 1,000 the overall loss occurs in grading and about half in Bookkeeper/ cutting. Secretary 4,100 The company employs twenty-five women in 3 Gasoline and Oil departments. Each of these women is paid $1.10 per (for cars) 400 (about $.01 per mile) hour. Last month's time cards indicate that their time was Travel (Lodging spent as follows: and Meals) 6,000 (Half for purchasing, half Grading 1,000 hrs for selling) Cutting 3,000 hrs. Packing cartons 7,200 (5 and 10 lb. boxes at Packing 600 hrs. $.07 each, and 20 and Total 4,600 hrs. 50 lb. boxes at $.10 each) Miscellaneous Last month's production and sales (cleaned, cut, Expenses 1,200 and boxed), in pounds, was: Sold aOne car is used in selling, the other in purchasing. Produced Pounds The building is used as follows: 1/4 for storing Grade A 50,000 50,000 7,750 unprocessed rags (average about 1 month's purchases), Grade B 50,000 50,000 6,500 1/4 for storing boxed rags (about one month's sales), 1/4 Grade C 25,000 25,000 3,125 for cutting, and 1/8 each for grading and cleaning. One Total 125,000 125,000 17,375 room used as an office is not counted in the building usage. All sales are local, and orders are received by phone or The company is organized as a partnership mail. between Mr. James Ringo, who acts as purchasing agent Last month's production activities, sources of and president, and Mr. John Wall who handles all sales. materials, prices, costs, and yields are representative of Before forming their partnership 6 years ago, Mr. Ringo normal operations. Sales usually follow production very was purchasing manager for a paper mill which produced closely, with very little seasonal fluctuation. fine rag-content papers. Mr. Wall had been responsible Two foremen are employed by the company, for waste products sales for a large clothing manufacturer. each paid $7,500 per year. Both are nephews of Mr. Ringo. One-fourth of their time is spent loading and This case was written as part of a student project unloading the washers and dryers. Another quarter of to provide cost analysis and business advice for the their time is spent moving packed boxes to the loading company. Mr. Ringo said he agreed to the project zone of the building for shipment. The balance of their because he had no formal cost accounting records at all. time is spent supervising and checking the women. He said he and Mr. Wall ran the business pretty much on The two washer and dryer sets owned by the their intuition and they often wondered whether there company are depreciated over 5 years on a straight-line might be more profitable ways to do things. basis. Each set has a capacity of 100 pounds per load and For example, Mr. Wall had asked him once why can cycle about 16 loads during a working day. he bothered to sort the junk rags at all since almost half of Expenses other than raw material and labor for a them are C grade anyway. He didn't really have ily have a good typical year are as follows: answer, and the question had led him to wonder whether he shouldn't perhaps drop the junk source altogether whenRingo Rag Company ny 223 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 8. Assign fixed overhead costs to each of the five nd couldn't prove to himself whether he was buying the right purchasing sources: mix. first, assign specific costs to the Junk source; He and Mr. Wall had built up a good set of then assign all other overhead equally across all steady customers over the years with good service and 5 sources; good quality at competitive prices. But they had no idea then divide by pounds sold to get fixed overhead which products were most profitable. per pound. QUESTIONS day of M 9. Item 7 less item 8 represents full cost profit by source. Your first task 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 Now, what does this have to do with the suggest you start as follows: management issues? Specifically: 1. Calculate average revenue per pound, by grade. 1. How close is the company to an optimal sourcing alf mix?? 2. Calculate weighted average revenue per pound for 2. Can you calculate profitability by grade? Is this each of the five purchasing sources. information useful? 3. What is your recommendation regarding selling all ch) cleaned, cut and packaged junk rags as C grade, 3. Calculate raw material cost per pound sold, for each without sorting? source. 4. What other recommendations do you have for Mr. Ringo? . Calculate direct labor cost per pound sold for: 5. As an overall assessment, is this business in serious ring a. grading need of your help, or not? ses) b. cutting consider yields carefully Hint: Can you estimate ROA (Return On Assets) for 1/4 the business? One 5. Calculate packing cost (labor and material) per pound ding sold. 6. Calculate variable overhead per pound sold for the rship junk source. agent ales. 7. Items 1 to 6 represent profit contribution by Ringo purchasing source. uced sible urer. oject the roject at all. ch on there why half of good