Precision World Wide

Precision World Wide has been faced with the decision like many businesses to alter products they are manufacturing to keep up with their competition and demand. With their competition creating a product that is similar but is made out of a more durable material they clearly have to make changes to offer their customers the value of the new plastic ring style. The dilemma being an already available supply of steel rings and material to produce these rings with no other production use.

The cost associated with the steel is a sunk cost, these are costs that have already incurred and cannot be recuperated, and should have no weight on their decision of what to do with manufacturing. Whether they decide to go with steel or plastic rings overhead fixed costs, such as leases and utilities, will remain the same. With the assumption that the rings material cost is nothing and the companies low labor costs, the production of steel rings has a very low opportunity cost and out of pocket costs.

PWI must ask at this point what exactly will a customer pay for the steel rings being produced? Will customers purchase steel rings when the option of plastic rings is available in the market? Customers get a greater value out of the plastic rings with a life cycle that is 4 times that of the steel rings and they are willing to pay four times as much for these rings. It can be assumed that if all customers know the plastic rings are available the buying of steel rings will soon end and positively PWI will not be able to charge $1350 per steel ring because of the introduction of the plastic rings as a substitute. It is smarter for PWI to move to production of the plastic rings with this kind of interest from their customer base.

PWI’s idea of selling steel in one area and plastic in another could be more harmful than helpful. While it may provide some short term benefit, if customers in areas that are being sold the steel rings get wind of the plastic rings being sold, to other...