RECOMMENDATION: My recommendation for Precision Worldwide, Inc. (PWI) is to immediately stop the production of steel rings. PWI then needs to sell the remaining steel rings to at least recoup some of their initial investment. In the meantime they should start producing, selling, and distributing plastic rings to their entire market of customers while attracting new customers who may prefer this new option.
CONCLUSION: By changing their production offering to the plastic rings, PWI will create more profit which in turn will keep them ahead of competitors in the industry. The remaining 15,100 steel rings will have to be calculated as a sunk cost. With this new product offering, PWI will be able to acquire new clientele across the globe and still be able to maintain the loyalty of their existing patrons.
RESULTS: When PWI sells 100 plastic rings, they are expected to make $838.25 more in profit than the sale of 100 steel rings. It costs $1107.90 to produce one hundred steel rings. When that is compared to creating a hundred plastic rings, which only costs $279.65, it becomes more evident why PWI should switch their product line. Plastic rings are also more durable than their steel counterparts and ultimately a better product overall.
The choice that Precision Worldwide, Inc. must make can essentially “make or break” them. Hans Thorborg, the General Manager, faces a predicament with how to deal with their existing and the in process inventory. He also has to come to a decision regarding the materials that have been obtained for inventory but PWI did not have the chance to actually process them before the change was made. Before Thorborg can make a decision, there are three main factors that need to be taken into consideration: the opportunity costs, the product substitution, and sunken costs.
I would recommend that Precision Worldwide, Inc. immediately start producing the plastic rings that were created by Bodo