SUBJECT: Evaluation of switching manufacturing materials
Mr. Van Boetzaleaer, After having a meeting with the Sales Manager, Accountant and the development engineer, I would like to address your concerns about introducing plastic rings into the market in competition with our competitor, Henri Poulenc, because of its much longer life and lesser cost as compared to I.G.'s steel rings and handling of excessive inventory of steel rings and special steel for their manufacturing.
According to the development Engineer, Anders Ericsson, we will be able to introduce plastic ring into market by mid-September. Plastic rings would be produced in approximately 400% (263.85/66.60*100) less cost but with four times the wearing properties of the steel rings. As a whole, with plastic rings we can get bigger profit margin as shown in exhibit 1. However, the inventory problem of steel ring is still unsettled. Ericsson suggestion is to focus the sale of steel rings to the less competitive area to where plastic rings are not being introduced yet.
On the other hand, according to sales manager, Harry Greine, steel inventory is counted as a loss. He believes that selling steel rings after completion of plastic rings production will cause market retaliation as after finding out about plastic ring, customers can consider this unfair and they can question that why they are paying same amount of money as of steel rings when plastic rings are better with greater longevity. This could ultimately damage company's name and sales.
Based on production cost, monthly sales forecast and net book value of the inventory producing more steel rings with special steel in inventory worth $26,400 would increase the number of steel rings to be sold to 49,600 after mid-September, instead of 15,100 which are remaining of the current steel ring inventory. This will also increase the net book value of