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Ringo Rag Company
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 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 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
it is cleaned and graded. Main customers for these rags are garages, service
rags in usable sizes, after
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.
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Laundries charge $3.00 per cwt. Past experience


Depreciation $3,060 ($760 washer and
indicates a33.33o/o loss factor. The yield ratio of material
$300 cutting
from the laundries is typically about l/4 gtade A, lD
tables; $2,000 for
grade B, and ll4 grade C. Last month, fungo purchased
60,000 pounds of material from laundries.
carsa). ,t
The highest loss factor is incurred from material
Gas
Natural 600 (Used for the

purchased from junk dealers, where it amounts to 50%. Electricity 480 (3/4 is atributable,tii
washers and dryers;
l:
ir
fn" 3rrt dealersi price for material is $ I -00 per cwt' Last
to cutting)
month, the company purchased 50,000 Pqunds from this
source. ThiC uhgraited material usually yields about l/5
Rent 3,200 (Leased buildingb)
Detergent (for the
gade A, 2t5 grade B, and 2/5 grade C rags. For the rags
purchased from junk dealers and laundries, about half of
washers) 1,000
grading and about half in Bookkeeper/
the overall loss occurs in
cutting.
Secretary 4,100
Gasoline and Oil
The company employs twenty-five women in 3
departments. Each of these women is paid $l'10 per
(for cars) 400 (about $.01 per
Travel (Lodging
hour. Last month's time cards indicate that their time was
spent as follows:
and Meals) 6,000 (Half for
for selling)
Grading 1,000 hrs
Cutting 3,000 hrs. Packing cartons 7,204 (5 and I0 lb. boxes t
$.07 each, and 20
Packing 600 hrs.
50 lb. boxes at $.10
Total *.000Jus,
Miscellaneous
Last month's production and sales (cleaned, cut, Expenses 1,200

and boxed), in pounds, was: aOne car is used in selling, the other in purchasing.
Sold
bThe building is used as fotlows: ll4 for
Produced Pounds S
unprocessed rags (average about I month's
Grade A 50,000 50,000 7,750
ll4for storing boxed rags (about one month's
Crade B 50,000 50,000 6,500
for cutting, and l/8 each for grading and
Grade C 25.000 25.000 3.125
room used as an office is not counted in the
Total u50ag 125-000 11-T15

The company is organized as a


All sales ars local, and orders are received by phone or
between Mr. James Ringo, who acts as purchasing
mail.
and president, and Mr. John Wall who handles all
Last month's production activities, sources of gefoie forming their partnership 6 years ago, Mr,
materials, prices, costs, and yields are representative of
was purchasing manager for a paper mitl which
normal opirations. Sales usually follow production very
fine rag-content papers. Mr. Wall had been
closely, with very little seasonal fluctuation'
for waste products sales for a large clothing manufi
Two foremen are employed by the company, This case was written as part of a student
each paid $7,500 per year. Both are nephews of Mr'
to provide cost anatysis and business advice [o
Ringo. One-fourth of their time is spent loading and company. Mr. Ringo said he agreed to the pi
unloading the washers and dryers. Another quarter bf
because he had no formal cost accounting records i
their time is spent moving packed boxes to the loading He said he and Mr. Wall ran the business pretty
zone of the building for shipment. The balance of their
their intuition and they often wondered whether'
time is spent supervising and checking the women' things.
might be more profitable ways to do i:
The two rvasher and dryer sets owned by the
For eiample, Mr. 'ivall had asked him onct
company are depreciated over 5 years on a straight-line
he bothered to sort the junk rags at all since alrnost t
basis. Each set has a capacity of 100 pounds per load and them are C grade anyway. He didn't really have d
can cycle about l6 loads during a working day'
answer, and the question had led him to wonder
Expenses other than raw material and labor for a
he shouldn't perhaps drop the junk source
typical year are as follows:
I

/
the washer/dryers wore out in a few years. He liked the E. Assign fxcd overhead costs to each of the five
idea of having several sources for raw material so he purchasing sources:
could shop around to keep his purchase prices low, but he
couldn't prove to himself whether he was buying the right first, assign specific costs to the Junk source;
mix. then assigrr all other overhead equally across all
He and Mr. Wall had built up a good set of 5 sources;
steady customers oyer the years with good service and then divide by pounds sold to get fixed overhead
good quality at competitive prices. But they had no idea . perpound.
which products were most profitable.
9. Item 7 less item 8 represents full cost profit by
-.- - source.
QUESTTONS
Your frst fask is to calculate "contribution margin" and
"full cost profit" for each of the 5 different purchasing Now, what does this have to do with the
sources (Junk, Laundry, Tex A,.Tex B, and Tex C). We management issues? Specifically:
suggest you start as follows:
l. How close is the company to an optimal sourcing
l. Calculate average revenue per pound, by grade. mix?? ,

2. Can you calculate profitability by grade? Is this


2. Calculate weighted average revenue per pound for information useful?
each ofthe five purchasing sounces. 3. What is your recommendation regarding selling all
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?
4. Calculate direct tabor cost per pound sold for: 5. As an overall assessment, is this business in serious
a. grading i need ofyour help, or not?
b. cutting ! considcr vields carefull-v Hint: Can you estimute ROA (Return On Assets) for
the business? t
5. Calculate packing cost (labor and material) per pound
s9ld.

6. Calculate variablc overhead per pound sold for the


junk source.

'l . ltems I to 6 represent profit contribution by


purchasing source.

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