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 $4.000. In terms of the managerial issues involved, it is still an excellent case for 2000s.

The Ringo Rag Company purchases scrap cotton fabric which is then converted into handy cleaning rags in usable size, 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 grade. Next, the rags are cut into squares of about 1 to 1,5 feet. A the same time, any attached item such as buttons, metal ornaments, or snaps are removed. Rags purchased from textile converters do not have anything attached to them. Prices of material which are too small for futher cutting or contain holes or are not usable for any either 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):

Quality	Carton Size
	5 lb	10 lb	20 lb	50 lb
A	$.90	$1.70	$3.20	$7.00
B	$.75	$1.40	$2.60	$5.50
C	$.70	$1.30	$2.40	$5.00

Raw material costs vary by source. Textile converters charge $6.00, $5.00, and $4,00 per cwt (hundred weight) for grade 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.

Laundries charge $3.00 per cwt. Past experience indicates a 33.33% loss factor. The yield ratio of material from the laundries is typically about grade A, grade B, and grade C. Last month, Ringo purchased 60,000 pounds of material from laundries.

The highest loss factor is incurred from material purchased from junk dealers, where it amounts to 50%. The junk dealers price for material is $1.00 per cwt. Last month, the company purchased 50,000 pounds from this source. This ungraded material usually yield about 1/5 grade A, 2/5 grade B, and 2/5 grade C rags, about half of the overall loss occurs in grading and about half in cutting.

The company employs twenty-five women in 3 departments. Each of these women is paid $1.10 perhours. Last months time cards indicate that their time was spent as follows:

Grading	1,000 hrs.
Cutting	3,000 hrs.
Packing	600 hrs.
Total	4,600 hrs.

Last months production and sales (cleaned, cut, and boxed) in pounds, was:

Grade	Produced	Sold
		Pounds	$
Grade A	50,000	50,000	$7,750
Grade B	50,000	50,000	$6,500
Grade C	25,000	25,000	$3,125
Total	125,000	125,000	$17,375

All sales are local, and orders are received by phone or mail.

Last months production activities, sources of materials, prices, costs, and yields are representative of normal operations. Sales usually follow production very closely, with very little seasonal fluctuation.

Two foremen are employed by the company, each paid $7,500 per year. Both are nephews of Mr. Ringo. One-fourth of their time is spent loading and unloading the washers and dryers. Another quarter of their time is spent supervising and checking the women.

The two washer and dryer set 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 can cycle about 16 loads during a working day.

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

Depreciation	$3,060	$760 washer and dryer; $300 cutting machines and tables; $2,000 for two cars. (a).
Natural Gas	$600	Used for dryers
Electricity	$480	is attributable to the washers and dryers, to cutting.
Rent	$3,200	Leased building (b).
Detergent (for the washers)	$1,000
Bookkeeper, Secretary	$4,100
Gasoline and oil (for cars)	$400	About $.01 per mile
Travel (Lodging and meals)	$6,000	Half for purchasing, half for selling
Packing cartons	$7,200	5 and 10 lb. Boxes at $.07 each, and 20 and 50 lb. Boxes at $.01 each.
Miscellaneous Expenses	$1,200
Notes: One car is used in selling, the other in purchasing. The building is used as follows: for storing unprocessed rags (average about 1 months purchased), for storing boxed rags (about one months sales), for cutting, and 1/8 each for grading and cleaning. One room used as an office is not counted in the building usage.

The company is organized as a partnership between Mr. James Ringo, who acts as purchasing agent and president, and Mr. John Wall who handles all sales. Before forming their partnership 6 years ago, Mr. Ringo was purchasing manager for a paper mill which produced fine rag-content papers. Mr. Wall had been responsible for waste products sales for a large clothing manufacturer.

This case was written as part of a student project to provide cost analysis and business advice for the company. Mr. Ringo said he agreed to the project because he had no formal cost accounting records at all. He said he and Mr. Wall ran the business pretty much on their intuition and they often wondered whether there might be more profitable ways to do things.

For example, Mr. Wall had asked him once why he bothered to sort the junk rags at all since almost half of them are C grade anyway. He didnt really have a good answer, and the question had led him to wonder whether he shouldnt perhaps drop the junk altogether when 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 couldnt prove to himself whether he was buying the right mix.

He and Mr. Wall built up a good set of steady customers over the years with good service and good quality at competitive prices. But they had no idea which products were most profitable.

QUESTIONS:

1.Calculate packing cost (labor and material) per pound sold.

2.Calculate variable overhead per pound sold for the junk source.

3.Assign fixed overhead costs to each of the five purchasing sources:

Now, what does this have to do with the management issues? Specifically:

1.How close is the company to an optimal sourcing mix?

2.Can you calculate profitability by grade? Is this information useful?

3.What is your recommendation regarding selling all cleaned, cut and packaged junk rags as C grade, without sorting?

4.What other recommendations do you have for Mr. Ringo?

5.As an overall assessment, is this business in serious need of your help, or not? [Hint: can you estimate ROA (Return on Assets) for the business?].