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Case Study

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Precision Worldwide, Inc.

Managerial Accounting
BUS 5431

Group 2

Kimberly Albino

Candace Hampton

Frances Kately

Husein Khan

Daniyell Payne

Hayley Romine

July 19, 2015

Table of Contents

Abstract 3

Key Issues and Problems 4

Decision Alternatives…

Resolutions and Solutions…

Recommendations…

References…

Abstract

The purpose of this case study is to examine, classify; analyze critical concerns as well as difficulties that are impacting Precision Worldwide, Inc.’s organization. Notably, Precision Worldwide, Inc. has several competitors who are well-disposed in the market due to their reduced pricing and product substitutions. The method in which this case study observation is arranged will explore findings and opportunities related to price and production cost; the ramifications of demand in other markets. The assessment of this case study, in conjunction with arriving to an appropriate cost for materials and freight, will help determine the recommended best course of action for Precision Worldwide, Inc. and Hans Thorborg in deciding the preferred product for the organization.

Key Issues and Problems

Precision Worldwide, Inc. (PWI) is faced with a business decision that will potentially affect the organization’s continuity and profitability. The organization recently held meetings to discuss the introduction of a substitute product into the marketplace by a competitor. In making a business decision to ensure the ongoing future of the organization, the key issues and problems need to be outlined to provide certainty that all issues and problems are addressed to facilitate a sound recommendation to the organization.

* Disproportionate level of steel ring inventory compared to demand

PWI currently has a large quantity of steel rings and specialized steel in inventory in excess of $390,000. The specialized steel cannot be resold, even for scrap. The inventory of special steel had cost PWI $110,900 and represents enough material to produce approximately 34,500 rings. The current demand results in 690 rings per week. At current production, approximately 15,100 finished rings be left in inventory my mid-September.

* Competition

Henri Poulenc, a France based firm, is PWI’s strongest competition.

Japanese manufacturers have entered the market since the late 1990s. They offer low-priced spare parts.

Other firms have entered the market who offer lower-quality and lower-priced machines.

* Introduction of a plastic ring substitute

The strongest competitor, Henri Poulenc, introduced a plastic ring substitute that sells for a lower price, has a lower production cost, and has four times longer wearing property compared to PWI’s steel rings.

* Price and Production Costs

[data/info]

* Other Markets and Effect on Demand

[data/info]

* Production Decision to Produce Plastic Rings and/or Steel Rings

* Costs: Suppliers and Shipping

Decision Alternatives

Precision Worldwide, Inc. is faced with a decision that will influence the future of the organization. After reviewing all the issues and problems PWI currently faces in regards to the production of steel rings versus plastic rings, the following decision alternatives are presented:

* Continue production and sales of the steel rings until the inventory is depleted and then begin production of plastic rings.

* Manufacture and produce only the plastic rings to stay competitive in the market. Discount the steel rings in inventory and discard the remaining special steel inventory as suggested by Gerhard Henk.

* Continue production and sales of the steel rings and begin production of the plastic rings but only offer the plastic rings in France, where Henri Poulenc is located. When demand for the plastic rings increase in the market, then discontinue production and sales of the steel rings.

* Explore other alternative uses for the specialized steel to possibly produce other steel products for the machinery.

Resolutions and Solutions
Resolutions and Solutions

1. Precision Worldwide, Inc. (PWI) should continue production and sales of the steel rings until the inventory is depleted and then begin production of plastic rings. The strongest competitor, Henri Poulenc, introduced a plastic ring substitute that sells for a lower price, has a lower production cost, and has four times longer wearing property compared to PWI’s steel rings. If PWI offered plastic rings, it will minimize any loss of market share while also decreasing production costs and increasing profit margins. The following table provides a cost analysis of production costs per 100 rings, monthly costs and profit, gross margin, and markup for both of the rings.

Table A

100 Plastic Rings 100 Steel Rings
Material $ 17.65 $ 321.90
Direct labor 65.50 196.50
Overheada
Departmental 131.00 393.00 Administrative 65.50 196.50
Total (cost) $ 279.65 $ 1,107.90

Rings sold per monthb 3,000 _ 3,000__
Revenuec $40,500.00 $40,500.00
Cost $ 8,389.50 $33,237.00
Profit $32,110.50 $ 7,263.00

Gross margin 79.29% 17.93%
Markup 382.75% 21.85% ________________________________________________________________________ aOverhead 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 80 cents per direct dollar or about 40% of the departmental amounts.

bRings sold per month was estimated on current sales rates of 690 rings per week rounded to the nearest whole number. Sales rate for the plastic rings may potential increase due to higher quality, brand recognition, and competition.

cRevenue is based on current selling price of the steel rings. It is projected that the plastic rings will sell at about the same price as the current PWI steel ring.

Due to competition and substitute products, production of plastic rings will enable PWI to stay competitive within the industry while meeting the increasing demand for the plastic rings until all inventories of the steel rings and specialized steel have been exhausted.

2. Precision Worldwide, Inc. should begin plans to immediately begin manufacturing plastic rings. By producing plastic rings, PWI will remain competitive in the industry while retaining its current customers with the potential to gain a higher market share and increasing customer value.

PWI’s strongest competitor, Henri Poulenc, a France based firm, currently offers the plastic rings for the same price as the PWI steel ring. If PWI does not produce plastic rings, Henri Poulenc will obtain approximately 10% of PWI’s markets.

Japanese manufacturers have also entered the market and increased competition by offering low-priced spare parts. Other companies have also entered the market with lower-quality and lower-priced machines. If PWI began offering plastic rings of a higher quality with competitive pricing, it will impact the other companies and potentially take away more of the market shares.

3. Precision Worldwide, Inc. should discontinue production of the steel rings and immediately begin production of the plastic rings. (Provide facts and a valid argument to support the solution option. Provide tables, charts, and other data that would provide numerical comparisons or information.) Etc.

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