Precision Worldwide

Topics: Costs, Microeconomics, Sunk costs Pages: 4 (1226 words) Published: May 22, 2013
Case Study #1; Precision Worldwide, Inc.


Precision Worldwide, Inc. (PWI) should cease production of their steel rings, proceed towards production of the new plastic rings, and scrap any unused or unsold steel inventories in conjunction with the availability of the new plastic ring product. The sooner the company is able to sell plastic rings, the sooner they will be able to realize the increased profit margins associated with that product. The introduction of the plastic ring from one of PWI’s competitors changes the dynamic of the market for this type of product as any end users of these rings will immediately see the merit of purchasing that said rings in plastic instead of steel. Any delays in making the plastic rings available could jeopardize PWI’s business relationship with buyers of the major assemblies that are also produced by PWI. The risk of losing buyers of major assemblies is too great to justify prolonged sales of the inferior steel rings once the plastic product is available. PWI should make every effort to reduce waste when disposing of raw steel inventory and finished goods. To facilitate this process, PWI may implement a 15% price reduction on steel rings until the beginning of September which will provide for increased sales for 14 weeks. The company will not make use of 70% wages during this time period due to the fact that the company will not be producing additional steel rings between May and September 2004. The projected loss to the company if remaining steel inventory is liquidated and scrapped-out at $0.00 is approximately $278,192.90 (see below). Total cost of Steel Inventories| $390,000.00 |

Cost of Raw Steel| $110,900.00 |
Cost of Steel Finished Goods| $279,010.00 |
| |
Inventory projected on-hand by Mid-September| |
(=15,100 rings/100*1,107.9)| $167,292.90|
| |
Total Scrap forecast| |
(=Raw Steel Cost + Mid-Sep inventory projections)| $278,192.90 |...
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