Precision Worldwide Inc Managerial Accounting Case Analysis

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Date Submitted: 10/09/2010 01:52 PM

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The variable cost of an organization changes in total in direct proportion to changes in activity. In Precision Worldwide, Inc. the variable cost include the material used to produce the rings and the labor associated to the production of the rings. The materials used to produce the rings are variable direct cost because are costs that can easily be associated with the particular ring being produced, plastic or steel. In the other hand, a fixed cost remains constant in relation to the quantity of production of the rings. For Precision Worldwide, Inc. fixed costs will be the same for the production of steel rings or plastic rings.

The overhead cost is a variable costs but it is an indirect cost because is not directly accountable to the production of the particular ring. For the cost of plastic and steel ring manufacturing, Precision Worldwide, Inc. allocated the overhead cost on the basis of direct labor cost. They estimated that the variable overhead cost are marginal salaries related to direct labor plus 80% of the direct labor amount or 40% of the departmental amount of manufacturing plastic or steel rings.

Hans Thorborg, as general manager of Precision Worldwide, Inc. (PWI), has a situation where he is expecting to introduce a new plastic ring that will cannibalize sales on its currently sold steel ring. The profit advantages of producing and selling the plastic ring are obvious (profit per hundred of plastic rings $1070.35 vs. $242.10 of profit from selling a hundred steel rings), but he needs to evaluate the effect of the cannibalization and take in consideration other variables like the current inventory of steel rings and special steel material. Predicted by Bodo Eisenbach, the Development Engineer, the demand of steel rings will be completely destroyed with the introduction of the plastic ring...