Precision Worldwide

1583 Words Nov 13th, 2010 7 Pages
Executive Summary

Precision Worldwide,Inc (PWI) is a manufacturing company of industrial machines and equipment for almost 90 years. One of their plants located in Frankfurt, Germany, produces a particular model at a price ranging from $ 18,900 to $ 28,900. Moreover, the plant has another department that manufactures steel retaining rings. These rings are considered as an integrate parts of the machines they are actually manufactured. This department can sell their rings either internally or externally because they are a large market and demand.

The general manager of the German plant, Hans Thorborg has been considering the introduction of plastic rings as a substitute for the steel rings. His idea comes from one of his competitor,
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As shown in appendix 6, by producing the steel rings from end of May to mid September, assuming that the sales volume stays at 690 per week, there will still be 15,100 rings left on inventory and it would require an additional 22 weeks to sell them. Furthermore, the raw material inventory will still have some steel available, which would require another 14 weeks to produce and sell.

Strategic Alternatives

Alternative 1

Discontinuing the steel ring production and start producing the plastic ring will allow Precision to enjoy immediately the huge contribution margin of 1,214.45$. This is possible because the sales price will remain relatively the same as the production cost decreases significantly. By comparing the old and the new contribution margin, there is an increase of 80%, which is a huge benefit for the company. Besides, even though Precision company is trying to base its strategy on the current steel inventory of over 390,000$, it should not affect the decision since it is a sunk cost. By introducing the plastic rings, it can solve the issue of the lost contribution margin by not producing and selling the steel rings. In fact, it can cover the lost contribution margin in a relatively short period. It is estimated that it would yield a profit of 738,500$.

Also, by
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