Points to Address in Precision Case Study

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Precision Worldwide, Inc case study. Begin by talking about the issues ….. Substantive Issues Raised. The primary issue at hand involves the relevant cost of a set of replacement parts. The parts, however, range from those that are totally manufactured and ready for sale, to those that have not yet been manufactured but for which raw material is on hand, to those that have not yet been manufactured and for which no inventory of raw material exists. The case solution turns in large part on the use of contribution analysis. However, the concepts of sunk costs, opportunity costs, and product substitution are prominent aspects of any reasonable analysis. The product in question, a steel ring, is used as a replacement part for…show more content…
Start with a listing of alternatives that Mr. Thorborg has available to him. Another point – look at the elimination of fixed overhead, This data could lead to the conclusions that since either type of ring could sell for the same price, the plastic ring would be more profitable to produce. Another point – eliminating the applied fixed overhead, however does not provide a clear picture of the underlying economics. There are still other items to consider. The raw material costs – are they irrelevant? The special steel used in the manufacture of the rings has already been purchased. Is there an alternative market for the raw steel. Producing the steel rings requires no further raw material cost. Another point- the amount of labor costs involved in manufacturing steel rings may be challenged. This may be done on the basis of the argument that Hans could decide, in May, to use some of the excess summer labor to convert the raw steel into rings. One may determine that without the labor savings the steel ring is still much more expensive to produce than the plastic ring. During the slack season it would be profitable to convert the existing raw steel inventory into rings. Another issue to address involves the unequal lives of the steel and the plastic rings. If the tests run to date by PWI’s development engineer are indicative, the plastic rings will last at least four times as long as the

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