CASE 26-3: PRECISION WORLDWIDE, INC.

Group 3:
Giselle Fabian Trish Mercado Anna Tomas

OUTLINE
Background Statement of the Problem Areas of consideration and Answer - Computation Recommendation

BACKGROUND

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 companys business.

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

BACKGROUND

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.

BACKGROUND

Over the years, competition has increased. The French firm Henri 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.

BACKGROUND

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

BACKGROUND
People in PWI
Hans Thorborg - General Manager of Precision Worldwide, 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

BACKGROUND

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 should proceed with plans for its production - expect Thorborg to exhaust all steel supplies.

BACKGROUND
Alternatives per PWI key persons
1) Continue sales of steel rings until September and discontinue the 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 was offered by competitors - Thorborg

STATEMENT OF THE PROBLEM

What action should Hans Thorborg take? Why?

ANALYSIS - HENK

=131 x 40%

=393 x 40%

ANALYSIS

=196.50 x 30% =157.20 x 30%

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

ANALYSIS

ANALYSIS

=49,600 x 13.50

=12,399 x 13.50

=106.11 x 345

=12,399 x 1.3555

RECOMMENDATION

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.

RECOMMENDATION

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!