Precision Worldwide Final

CASE 26-3: CASE 26-3: PRECISION WORLDWIDE, INC.PRECISION WORLDWIDE, INC.

Group 3:

Giselle FabianTrish MercadoAnna Tomas

OUTLINEOUTLINE

• Background

• Statement of the Problem

• Areas of consideration and Answer - Computation

• Recommendation

BACKGROUNDBACKGROUND

Precision Worldwide Inc. (PWI) is a manufacturer of industrial machines and equipment for sale in numerous countries. Repair and replacement parts account for a substantial part of the company’s business.

Steel Ring is one of the replacement parts manufactured by PWI that can be used on some competitor’s machines.

BACKGROUNDBACKGROUND

Steel Ring has an average normal life of about 2 months.

A machine requires between 2 to 6 rings to operate.

Individual rings are replaced as they wore out.

BACKGROUNDBACKGROUND

Over the years, competition has increased. The French firmHenri Poulenc entered the market with a superior plastic ring that would substitute the steel ring. 10% of PWI market will be affected.

Plastic ring is less costly to manufacture and has a longer life.

BACKGROUNDBACKGROUND

Plastic ring has the same price as steel ring - $1,350

PWI still has a large quantity inventories of steel rings that they have purchased that cannot be sold even for scrap. Total book value is $390,000

BACKGROUNDBACKGROUND

People in PWI

Hans Thorborg

- General Manager of PrecisionWorldwide, Inc.

Gerhard Henk- Sales Manager, asking when this product will be available for him to sell that his competitor already has on the market, particular in France

BACKGROUNDBACKGROUND

Bodo Eisenbach- Development Engineer- Estimated that the plastic rings could be produced by mid-September.- tools and equipment could be obtained for about $7,500

Patrick Corrigan- parent company spokesman- agreed that the company shouldproceed with plans for its production- expect Thorborg to exhaust all steelsupplies.

BACKGROUNDBACKGROUNDBACKGROUNDBACKGROUND

Alternatives per PWI key persons

1) Continue sales of steel rings until September and discontinuethe sales once plastic rings are available.

-Henk

2) Manufacture new rings as soon as old models are exhausted, plastic rings would only be sold in those areas where it wasoffered by competitors- Thorborg

STATEMENT OF THE PROBLEMSTATEMENT OF THE PROBLEM

What action should Hans Thorborg take? Why?

ANALYSIS - HENK ANALYSIS - HENK

=131 x 40% =393 x 40%

ANALYSISANALYSIS

•Material considered as sunk cost• Considering the employment labor at about 70% of regular wages(cost x 70%)

=196.50 x 30%

=157.20 x 30%

ANALYSISANALYSIS

ANALYSISANALYSIS

=49,600 x 13.50 =12,399 x 13.50

=106.11 x 345

=12,399 x 1.3555

RECOMMENDATIONRECOMMENDATION

Thorborg should still continue to sell steel rings until plastics rings are ready for the market.

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.

Should instruct Eisenbach, to begin the process to enable the company to manufacture the plastic rings.

RECOMMENDATIONRECOMMENDATION

Customers must be notified once plastic ring becomes available in the market.

During slack manufacturing period, Hans to instruct the factory to concentrate on manufacturing steel rings at the reduced labor rate to incur a surplus of steel rings and during the peak season to concentrate on plastic rings.

Sales of steel rings must be monitored and in time sales are faltering, production must stop and should eventually sell plastic rings only.

END OF REPORT

Thank you!