Reference no: EM13334649

Container Plastics Company

Ron Forlani has just gone public and expanded his container business. As a creative and skilled engineer, Ron develops technologically advanced machinery and moulds, which provide Container Plastics with a competitive advantage. Above aver­age profits come from the technological advan­tages, but only temporarily as competitor imitation takes between six months and one year.

Ron has two tactics for addressing this tech­nology copying. First, he plans and works towards continuously introducing technological improve­ments in processes and products. For example, there is an ongoing goal for production costs to decrease 8 percent a year. Second, Container Plas­tics stresses new products. For example, there is a policy that 25 percent of the sales each year must come from products introduced in the past five years.

Container Plastics is in the plastic products industry, specifically in the rigid packaging sector. Its products include pop bottles, cosmetic jars, beverage cases, dairy cups and tubs, food trays, pails, and oil containers. In the industry, there are constant modifications and improvements in machinery and processes. Technology is becoming an increasingly important competitive factor in productivity as are product quality and perfor­mance. The industry is being pressed to increase the use of higher-performance polymer materials, instrumentation, controls and automated materials-handling techniques in its processing operations. While these technologies continue to be generally available, they are more demanding in their imple­mentation, and operation and maintenance, reflect­ing a greater need for higher levels of labour and management skills. Such skills are generally scarce. This is not so with Container Plastics.

Container Plastics is one of the few Cana­dian organizations that have developed extensive research and development capabilities. The Cana­dian market was not large enough. However, the free-trade agreement with United States, and the reduction in the tariff barrier that protected Canadian rigid packaging organizations, has forced Container Plastics to compete in a larger market.

In this larger market, competition is aggres­sive and persistent. In addition, waste disposal difficulties with plastics have placed pressure on the industry for solutions. Container Plastics and its competitors have reduced the amount of plastics used in given applications and developed means for economically recycling plastic materials. Addi­tionally, the trade association, the Society of the Plastic Industry of Canada, has a very active program to educate the public about the role of plastics in the environment and to implement viable technologies in Canada that will reduce the amount of plastic materials that eventually reside in landfill sites.

The performance advantages of plastics over competitive products, assures their status as a material of choice in a wide range of applications. Because of evolving global marketing strategies, including rationalization, and tougher competition due to lower tariffs, the industry will not maintain the past rate of growth. Nevertheless, the growth rate will continue to exceed that for the Canadian manufacturing sector.

A technological advantage of Container Plas­tics is that production set-up can be done relatively quickly and inexpensively. Consequently, five basic moulding machines produce nearly 100 different products. This is a sharp improvement from earlier technology which would have required 20 or more moulding machines.

Ron wants accurate product costing for profit­able expansion. As the organization is new, he believes the time is appropriate for developing a costing system that is accurate and efficient. Ron has some understanding of job-order and process costing systems and standard costing, but he does not know what to use as the organization grows.

You have learned the following about Con­tainer Plastics:

There is a sales staff of eight persons, who are located throughout Ontario, Quebec, and North­eastern United States. Agents are employed in Atlantic Canada.

Sales persons contact clients, former clients, and prospective clients for orders. With product design engineers and the production scheduling manager, the sales person prepares a quotation.

Generally, an order is for a certain quantity of a specified product. It will be for a future period, generally a year, with delivery being on a regular schedule or as requested if the client organiza­tion uses a JIT inventory system.

Product pricing is a markup of 1200 percent over cost, which is calculated as direct materials. All other costs are indirect. The markup gets reduced if necessary to obtain an order. Ron must approve all "markdowns," which he does automatically if the sales person requests.

• As long production runs reduce set-up costs, products are often inventoried for clients. There is no charge for this service.

The indirect manufacturing costs are many times larger than the materials costs, as shown below. With 27 months of data, you run simple regressions to understand what drives the various indirect cost categories. Exhibits 1 and 2 show the operating statement and the regression equations, respectively.

Note: for the constant or intercept, the t-value was equal to or greater than 2 for above equations 2, 4, and 5 and less than 2 for the others.  For the slope or beta, the t-value was equal to or greater than 2 for equations 1, 3, 6, and 7 and less than 2 for the others.

Required As the new controller hired to make Container Plastics a world class organization, use the case approach to put forth recommendations for a cost system that will help in accurately pric­ing quotations.