Harvard Business Case 1 - Precision World Wide, Inc.
Managerial Accounting BUS5431, Spring 2015
What action should Hans Thorborg take? Why?
Hans Thorborg is the general manager of a manufacturing firm, Precision Worldwide, Inc., which produces steel rings for various domestic and international companies. Recently there has been a shift in the market to a new product, a ring made of plastic rather than steel. The new product is of a higher quality in regard to consumer concerns compared to the steel ring as well as much cheaper to produce for Precision Worldwide, Inc.
Thorborg’s business decision dilemma is to accept the sunk cost of materials (steel) already purchased to produce steel rings as well as the steel ring…show more content… They should begin selling the plastic rings in all of their markets (the competitive markets and markets where no one else is producing them currently). By doing this they can become an industry leader in those markets where they were the first and producer of the new plastic rings. In their competitive markets, they should competitively price their plastic rings in order to sustain and attract customers/consumers.
In regards to the steel rings that are already finished: They should continue to sell these to customers who prefer (in all markets) them over the plastic rings AND they should also continue to use these rings in the industrial machines and equipment they are manufacturing and then when they need replacing, use the plastic rings instead. The steel rings should be used and/or sold until all inventories are depleted. They should “phase” them out.
We believe that PWI should use excess labor during slack periods to use the current inventory to produce more steel rings. If Thorborg was to use the slack periods to bulk build steel rings, the company would only save around $58 per 100 rings due to the slack period wage pay. This would drop the labor costs down to $137.55 and total costs drop down to $1048.95 all per 100 rings. By doing this, PWI might be able to recoup some costs prior to the plastic ring launch.
Hans Thorborg has many options to consider and a management team which has offered many valid reasons to