Precision Worldwide

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Precision Worldwide, Inc. Case Study
Case Study Background: Precision Worldwide, Inc. (PWI) manufactures industrial machines and equipment for sale in numerous countries. Repair and replacement parts account for a substantial part of the company’s business. The replacement part in question, steel rings, occur in the machines manufactured only in PWI’s Frankfurt Germany plant, but can also be used on some competitor’s machines. The steel ring manufactured by PWI has an average normal life of about 2 months. Machines require between 2 and 6 rings to operate. Individual rings are replaced as they wear out. Over the years, competition had increased and now a competitor company, the French firm Henri Poulenc, has entered the market with a superior plastic ring that replaces the steel ring. The plastic ring is less costly to manufacture and has a longer life. Identification of Parties:

Precision Worlwide, Inc.| German Firm|
Competitor-French Firm| Henri Poulenc|
Hans Thorborg| General Manager|
Gerhard Henk| Sales Manager|
Bodo Eisenbach| Development Engineer|
Patrick Corrigan| Parent Company Spokesman|
Specific Situation for Analysis: The PWI sales manager, Gerhard Henk, is asking when this product will be available for him to sell that his competitor already has on the market, particularly in France where the competitor is the strongest. Bodo Eisenbach, the PWI development Engineer, estimates the plastic rings can be produced in about 4 months at a tool and equipment cost of about $7,500. PWI currently has about $390,000 worth of special steel in current inventory that cannot be sold, even for scrap. Patrick Corrigan, from the parent company spokesman, expects Thorborg to exhaust all steel supplies. If sales of the steel ring continued until the plastic rings were ready for the market about 15,100 rings would remain in stock upon the plastic rings release date. Decision needed: This case is about a competitor coming out with a plastic replacement part appearing to have a significant cost advantage over an original metal part. The decision that must be made is whether to start producing the plastic parts. 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 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 Administrative| 131.0065.50| 393.00196.50| Total| 279.65| 1107.90|
Note:* Overhead was allocated on the basis of direct labor cost. It was estimated that the variable overhead costs included here were largely fringe benefits related to direct labor and amounted to $0.80 per direct labor dollar or about 40% of the departmental amounts. Possible Options or Alternatives 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) Sell steel rings until plastics rings are ready for the market. Thereafter, sell plastic rings in markets where the competitor offers plastic rings and sell steel rings in other markets till all currently manufactured steel rings are exhausted. Scrap remaining steel stock. Then sell plastic rings only. 4) Sell steel rings until plastics rings are ready for the market. Thereafter, sell both plastic and steel rings. Sell steel rings at a reduced cost due to less longevity than plastic ring. Manufacture and sell steel rings until all steel stock is exhausted. Then sell plastic rings only. 5) Sell steel...
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