Case Study for Precision Worldwide, Inc

Case Study for Precision Worldwide, Inc.

Solution

Considering the option of continuing production of steel rings or switching to plastic rings, incremental analysis demonstrates plastic rings will decrease cost while decrease increasing profit.

Table 1

Alternative 1 Alternative

2

(per hundred) plastic steel

Selling price 1,350.00 1,350.00

Rings sold per week 6.90* 6.90*

Revenue per week 9,315.00 9,315.00 0 Incremental revenue

Manufacturing Cost 279.65 1,107.90

Cost per week 1,929.59 7,644.51 -5,714.93 Incremental cost

Profit 7,385.42 1,670.49 5,714.93 Incremental Profit

• The company sells 690 rings per week. Since cost calculations are in hundreds, price ($1,350) is multiplied by 6.90 (690/100) to obtain revenue generated per week. Manufacturing cost is also multiplied by 6.90 to compute cost per week.

Incremental revenue between Plastic and Steel is zero. This results from the company charging the same price for both products. Incremental cost decreases by $5,714.93, likewise yielding an incremental profit of $5,714.93 per week, which equals $297,176.36 incremental profit a year!! This data suggests it is important to start manufacturing on new plastic rings as soon as the new equipment becomes available; the projected time frame is September.

The additional profit between plastic and steel rings derives from the decrease in manufacturing cost.

Table 2

Manufacturing Costs (per hundred rings)

Table A Plastic Steel Difference

(Plastic - Steel)

material 17.65 321.9 -304.25

direct labor 65.5 196.5 -131

overhead .80/$DL .80/$DL

departmental 131 393 -262

administrative 65.5 196.5 -131

total cost 279.65 1,107.90 -828.25

A break down of expenditures points to a large gap in manufacturing costs between plastic and steel. Variable costs, material and direct labor, are reduced $435.25 by converting to plastic as well as a $393 reduction of departmental and administrative fixed costs.

Table 3

Profitability