The primary issue at hand involves the relevant cost of a set of replacement parts. The parts, however, range from those that are totally manufactured and ready for sale, to those that have not yet been manufactured but for which raw material is on hand, to those that have not yet been manufactured and for which no inventory of raw material exists. The case solution turns in large part on the use of contribution analysis. However, the concepts of sunk costs, opportunity costs, and product substitution are prominent aspects of any reasonable analysis.
The product in question, a steel ring, is used as a replacement part for industrial machines manufactured and sold by both Precision Worldwide, Inc and their competitors. It sells for $1,350 per hundred rings with annual sales of approximately 36,000 rings. One competitor, Henri Poulenc, has introduced a plastic ring. This ring lasts up to four times as long and is priced at about the same level as PWI’s product.
Mr. Thorborg, the gm of the German plant of PWI, must analyze the data, the conflicting views of his sales manager and his development engineer, and make a decision as to whether PWI should begin the manufacture of a plastic ring. In addition, a plan needs to be designed as to the pricing policy to follow for both the steel and the plastic rings. Finally, some consideration should be given to the effect of the decision upon the firm’s image in the marketplace.
Many of the issues involved in the suggested analysis of the case cluster around relevant costs and contribution analysis. The case illustrates several different layers of sophistication in terms of relevant cost analysis. Some ideas to review: address the concept of eliminating applied fixed overhead in a short run, relevant cost analysis – analyze and discuss the concept of sunk costs in a relevant cost analysis, look at the “product... [continues]
The product in question, a steel ring, is used as a replacement part for industrial machines manufactured and sold by both Precision Worldwide, Inc and their competitors. It sells for $1,350 per hundred rings with annual sales of approximately 36,000 rings. One competitor, Henri Poulenc, has introduced a plastic ring. This ring lasts up to four times as long and is priced at about the same level as PWI’s product.
Mr. Thorborg, the gm of the German plant of PWI, must analyze the data, the conflicting views of his sales manager and his development engineer, and make a decision as to whether PWI should begin the manufacture of a plastic ring. In addition, a plan needs to be designed as to the pricing policy to follow for both the steel and the plastic rings. Finally, some consideration should be given to the effect of the decision upon the firm’s image in the marketplace.
Many of the issues involved in the suggested analysis of the case cluster around relevant costs and contribution analysis. The case illustrates several different layers of sophistication in terms of relevant cost analysis. Some ideas to review: address the concept of eliminating applied fixed overhead in a short run, relevant cost analysis – analyze and discuss the concept of sunk costs in a relevant cost analysis, look at the “product... [continues]
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"Cost of a Set of Replacement Parts." StudyMode.com. 11, 2011. Accessed 11, 2011. http://www.studymode.com/essays/Cost-Of-A-Set-Of-Replacement-836225.html.
