Harvard Business Case 1 - Precision World Wide, Inc.
Managerial Accounting BUS5431, Spring 2015
What action should Hans Thorborg take? Why?
Hans Thorborg is the general manager of a manufacturing firm, Precision Worldwide, Inc., which produces steel rings for various domestic and international companies. Recently there has been a shift in the market to a new product, a ring made of plastic rather than steel. The new product is of a higher quality in regard to consumer concerns compared to the steel ring as well as much cheaper to produce for Precision Worldwide, Inc. Thorborg’s business decision dilemma is to accept the sunk cost of materials (steel) already purchased to produce steel rings as well as the steel ring inventory, and transition Precision Worldwide, Inc. into the market of plastic rings or to continue to produce and sell steel rings until supplies and inventory is depleted as to not take a loss.
We think that they should prepare for and begin manufacturing the plastic rings. They will save (in manufacturing costs alone) an average of about $22,859.70 per month. The steel rings costs $30,578.04 a month to produce (690*4 weeks = 2,760/month, divided by 100 rings * $1,107.90). The plastic rings will cost only about $7,718.34 per month to produce. If they are trying to recoup to book value of the inventories ($390,000), it would take about 17 months to do this IF sales levels stay the same and they do not produce any more steel rings, and of course if they trash that inventory. We do not think they should trash the inventories. There are ways to use up this product and inventory. However, we wonder how much the plastic cost that will be used to produce the new plastic rings. We believe that opposing the sales of any steel rings once the plastic ones become available not to be a good idea because you do not want to inhibit any possible profit from the sales of the steel rings. Also, we believe the...
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