Precision Worldwide, Inc

Background:

- PWI manufactures industrial machines and equipment for sale in numerous countries;

- Repair and replacement parts, which account for a substantial part of the company’s business, are sold separately;

- PWI manufactures a steel ring which is used as a replacement part in the machines sold by PWI as well as in machines sold by competition. The steel ring has an average normal life of about 2 months, it is replaced in a few seconds and machines require between 2 and 6 rings to operate.

- In the past years, competition had increased and a French firm, Henri Poulenc, has entered the market with a plastic ring that replaces the steel ring.

- The plastic ring is less costly to manufacture and has a approximate life of 4 times longer than steel rings;

- Currently PWI has steel rings and special steel inventories of 390 000$;

- Hans Thorborg, the general manager has scheduled a meeting with the sales manager, accountant and development engineer to discuss future plans;

Problems:

- PWI should start to manufacture the new plastic ring as soon as possible so they can compete in France against Henri Poulenc;

- What to do with the inventories of steel rings and plastic rings?

Findings:

- The special steel inventory could not be sold, even for scrap;

- The equipment to produce plastic rings costs 7 500 $;

- Selling price of the new Plastic ring would be 1 350$, same as for the steel ring;

- The special steel inventory that amounts to 110 900 could produce 34 500 new rings;

- Demand for steel rings is 690 rings / week;

- The new plastic ring would be available for sale at mid-september at which time, there will still remain 15 100 finished steel rings without any future production;

- The company is going into a slack period for 2-3 months during which it employs labor at 70% of regular wages;

- Overhead was allocated on the basis of direct labor cost. It was estimated that the...