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Case study

RK Forging Company

Ram Krishna Forging Limited was founded on 12th November, 1981. RK Forging Company is a forging company based in Coimbatore serving several sector including; power, automotive, oil and gas, construction, mining, locomotive, and aerospace.

Ram Krishna Forging Limited commenced its production in 1984 as a SST unit.

In 1995 RKFL became a supplier to TATA Motors.

In 2002 RKFL was approved by India Defense for producing defense related parts.

INTRODUCTION

CASE ANALYSIS This case highlights the kind of decision making issues.

The conflict is between the marketing department and costing department.

The marketing department is of the idea that charging full cost on the first order would;

•Increase the price of the product•Make the product less competitive in the market•Cause customers to look for much more affordable price

costing department thinks that marketing department pricing will only bring customers but operating profit has to increase, because for the past years operating profit keeps declining due to such pricing decisions. Therefore it would be wise to charge full cost on the first order.

In addition to that the marketing department raised an issue related to production overhead. They think there should be different rates for different machines the machine shop.

Profitable orders are lost because of wrong pricing.

Costing department is of the idea that rating the machines will require additional manpower which option is not possible since operating profit margin is not good.

Lastly decision by executive committee whether it is profitable to charge only one third of the product cost for the first order and also to see if there is need to change production overhead rates.

ISSUE IDENTIFICATION

•Pricing decision for the order

-whether to charge full cost in first order

-or take risk by spreading the cost cover into 3 orders even if remaining orders are placed or not.

-Calculation of costs•Production at 62% capacity20,000 * 0.62*1000 = 12,400,000•Estimated hours required20,000 * 72 = 1,440,000

PROPOSED SOLUTION

•Labor + material500 * 1000 = 5,00,000•Investment1,500,000Pricing done by marketing department; charging 1/3 0f cost

Material cost 5,00,000Overhead cost 1,440,0001/3 0f cost 5,00,000Total order cost 24,40,000Add: Mark up cost 10,17,480Sales value 34,57,480Price per unit 3,457-Pricing done by the costing department: charging full costMarket cost 5,00,000Overhead cost 14,40,000Full product cost 15,00,000Total order cost 34,40,000Add: Mark up cost 14,34,480Sales value 48,74,480Price per unit 4,874There is 29% difference in both prices

Sales: 140,457,480Less: material 16,340,000Less: overhead 29,760,000Less: product cost 15,00,0000 Profit: 92,857,480Current profit 19,00,000

Sales: 141,874,

Estimated profit under the two different pricing.

•The order is more profitable if 1/3 product cost is charged for the first order.•Production overhead is the same. •Need for change in overhead rates. •New and old machines.•High cost and low cost.•Different power made for different orders.•Should be priced at different rates.