Precision Worldwide Inc. Case

Precision Worldwide Inc.

Overview:

Precision Worldwide Inc (PWI) is headquarter in the USA and has a plant in Germany that manufactures industrial machines and equipment to numerous countries around the world. A good portion of the company's revenue is from repair and replacement of parts for these machines. The specific part being focused on for this case study is the steel rings which are manufactured in their German plant. These rings are also used in their competitor's machines too. Depending on machine usage these rings usually last 2-3 months before they need to be replaced, and are normally replaced 1 -2 at a time. The critical decision facing PWI is competition from a plastic form of the ring. Their competitor, Henri Poulenc is the developer of this variant; and has already started to sell this new product in the French market. There are numerous advantages to the plastic ring such as longer durability and lower manufacturing cost in comparison to the steel rings. The company must now consider the impact the plastic ring has on the market in competing with their steel rings, should they produce the plastic ring too and how it impacts current unsold inventory of steel rings.

Gerhard Henk is the sales manager at PWI and has requested how quickly they can start producing the plastic rings. Henk sees this as a must have as stated previously their competitor in France is already making this available and hence eroding the steel ring market in that region. The estimates that come back indicate the plastic rings can be produced in about 4 months for $7,500. In inventory PWI has $390,000 of "special" steel that Patrick Corrigan is expecting to be consumed making the last set of steel rings. From PWI's cost accounting department:

Table A

When comparing the cost of the Plastic and Steel ring, you can remove the costs that are same for both products that are not a manufacturing cost. Looking at the previous table administrative overhead is a non-manufacturing cost which is the same for both products. Using the data from the Table provided from the case study of PWI, with administrative overhead cost removed and departmental overhead cost reduced.

If PWI considered stopping making steel rings. Any materials already purchased are slated as sunk cost.

Another way to help with the steel ring situation is to reduce cost