Precision Worldwide, Inc. Case Study

Precision Worldwide, Inc. Case Study

Summary

Precision Worldwide, Inc. (PWI) manufactures industrial equipment and parts for sale in numerous countries. Repair and replacement parts account for a substantial part of the company's business with the replacement part in question, steel rings, occur in the machines manufactured only in PWI's German plant, but can also be used on some competitor's machines. This steel ring has an average normal life of about 2 months. These individual rings are replaced as they wear out and recently competition has increased and now a competitor has entered the market with a superior and less expensive plastic ring that can replace the steel ring.

The general manager of the German plant, Hans Thorborg has been considering the introduction of a similar plastic rings as a substitute for the steel rings. There is a lot of potential for this product in this market because there is a lower manufacturing cost and a greater durability compare to steel rings. The company is wondering if it is worth to shift from steel rings to plastic rings, but there are a lot of facts that they need to consider. There has been conflicting views concerning the future of the steel rings departments if they should change to plastic rings in order to acquire competitive advantage in this market and what will they do with the special steel after they have implemented the new product.

A decision must be made as whether to start producing the plastic parts or continue with the steel rings. The decision focuses on three key issues involves, doing incremental analysis of what amount of overhead, materials, and direct labor are relevant in making the decision to produce the new part

Contribution analysis

Information supplied from PWI's cost accounting department:

Title 100 Plastic Rings 100 Steel Rings

Material 17.65 321.90

Direct Labor 65.50 196.50

Overhead

Departmental 131.00 393.00

Administrative 65.50 196.50

Total 279.65 1107.90

Possible scenarios for PWI:

1) Sell only steel rings until plastics rings are ready for the market. Thereafter, sell only plastic rings and scrap all remaining steel rings and steel inventory (sunk cost).

2) Sell only steel rings until plastics rings are ready for the market. Thereafter, sell plastic rings only in markets where the competitor offers plastic rings. Manufacture and sell steel rings in other markets till all steel is exhausted. Then sell plastic rings only.

3)