Precision worldwide Incorporation is associated with manufacturing of equipments and parts related to industrial manufacturing units in different countries around the globe. Repair and replacement related parts are considered to be one of the most significant products of the company. Steel rings are considered to be one of the most significant products manufactured by the German plant of the company. Average normal life of a steel drinks is approximately two months. It is required to be frequently replaced due to usage. Different competitors have now introduced similar spare part with superior and less expensive replacement.

General Manager of the plant in Germany has been thinking about introducing a similar plastic ring in order to substitute steel ring in order to make it less expensive and competitive and market. This product is highly potential oriented. Company is making decisions whether they should transfer from Steel rings into plastic rings or not. It is important for the management to make appropriate decision regarding production and introduction of plastic parts or continuing the Steel rings.

Contribution analysis

Information supplied from PWI’s cost accounting department:

Title 100 Plastic Rings 100 Steel Rings

Material 17 321

Direct Labor 65 196

Overhead

Departmental 131 393

Administrative 65 196

Total 279 1107

There are some possible solutions which can be implemented by the company in order to make appropriate decision

Company can continue selling their Steel rings until decide amount of plastic rings are manufactured and distributed in market. With introduction of plastic Rings, the remaining Steel rings can be sold by the company as a scrap.

Company can continue selling Steel rings. They can fell plastic rings only in those markets where competitors are offering plastic rings. Later on, they can manufacture Steel rings and distribute in market where Steel rings are not avail

Sell all the Steel Ring available in inventory until the plastic rings are ready to be sold in market. Company can sell Steel rings in markets where it is not available and cancel plastic rings in market where it is not available. With the passage of time, steel stock can be scrapped accordingly and plastic rings should be continued for selling.

Selling Steel rings in the market until unless plastic rings are properly manufactured and distributed in market. Both types of rings can be sold by the company at reduced cost in order to effectively compete with competitors. Manufacture and sell the Steel rings related items until unless the stock is finished. Then the company can continue selling plastic rings only.

Sell only the Steel rings and do not bother regarding manufacturing and selling plastic rings.

Following can be possible issues for the company:

· Cost associated with scrapping of the unused Steel rings.

· Cost associated with scrapping of Steel related stock.

· Influence of the news when the customers will came to know that plastic things were better and company was not offering plastic rings.

· Losing the potential customers by not entering and the plastic market soon as compared to competitors.

· The effect of manufacturing plastic ring as compared to the lifespan of Steel Ring.

· Opportunity cost related to manufacturing of plastic ring or not.

Scenario 1 of Report for Precision Worldwide, Inc

The following table contains the calculation of the expenses related to the manufacturing of both type of rings plastic ring and steel ring. It does not contain administrative overhead related expenses as it is not associated with manufacturing.

Title 100 Plastic Rings 100 Steel Rings

Material 17 321

Direct Labor 65 196

Overhead*

Departmental 52 157

(80% of Direct Labor)

Total 135 675

Using the above table, for incremental analysis purpose,

Unit cost of Plastic Ring = $135.55 / 100 = $1.36

Unit cost of Steel Ring = $675.60 / 100 = $6.76

Scenario 2 of Report for Precision Worldwide, Inc

The following table provides the cost provided by the cost accounting department and it also includes the sun cost related to steel rings. Administrative related cost have been removed and department related overhead expenses have been reduced.

For 100 Steel Rings:

Cost of Material (Sunk Cost): (321.90)

Cost of Labor (100% labor charge): 196

Cost of overhead: 157

Total cost – Sunk cost: 675 – 321 = $354

Unit cost of Steel Ring (with Material cost as Sunk): 354 / 100 = $3.54

Scenario 3 of Report for Precision Worldwide, Inc

The following table provides the cost details provided by the cost accounting department and it includes the Steel Ring related labor cost as well by including 70% of the regular wages which is basically associated with flag time. Steel rings material related expenses have been included as a sunk cost. Administrative related expenses have been removed and department related overhead expenses have been reduced.

For 100 Steel Rings:

Cost of material (Sunk Cost): (322)

Cost of Labor (70% of regular labor charge): 137

Cost of overhead: 157

Total Cost – Sunk Cost = $294

Unit cost of Steel Ring (with Material cost as sunk cost and labor charges reduced to 70%): $294.75 / 100 = $2.95

Scenario 4 of Report for Precision Worldwide, Inc

The following calculation provides details regarding the influence of plastic rings as compared to steel ring lifespan.The results of the analysis suggest that in presence of plastic Rings, the price of the steel ring should be one third of the price of plastic rings in order to make sure that company is able to sale Steel rings in market to customers in order to effectively compete with alternative plastic drinks available in market.

Final Decision on Report for Precision Worldwide, In

I believe that the chief executive officer of the company should go with the last scenario which clearly suggest that company should sell the available Steel rings in market until unless plastic rings are properly manufactured and ready for sale and after this the company can properly sale both Steel rings and plastic rings in market. It is ideal for the company to make sure that initially their sell Steel rings at less cost in market as compared to the plastic ring by considering the sun cost of the Steel rings. Per unit cost of the steel ring should be reduced as compared to the unit cost of plastic drinks in order to make sure that the company can effectively compete in market. Company should manufacture and sell all the Steel rings stock available until each and every stock of Steel Rings is exhausted. After completely selling the Steel rings in market, the company can move forward and market by selling the plastic rings only and it will help the company to reduce the laws related to sunk cost of the Steel rings.

Chief executive officer of the company should instruct is relevant Development Manager in order to initiate the procedure to make the company capable of manufacturing the plastic rings. Company should not stop selling the Steel rings until unless plastic rings are completely manufactured and are ready for sale in market.

When the plastic rings are completely manufactured and are available for sale then the relevant sales manager should be in structured to start selling the plastic rings only in market in order to jeopardize market and to push details of the Steel rings at comparatively reduced cost in all other markets in which it is not available. All the new customers should be notified regarding the new item plastic rings and they can select plastic ring or steel ring according to their choice or requirement.

During the slack manufacturing time, company chief executive officer should instruct the factory to enhance the concentration related to manufacturing of steel ring. Production of steel ring should be continued at a reduced labor cost in order to increase the concentration related to manufacturing of plastic rings.

It is responsibility of the management to frequently analyze the selling and manufacturing process of Steel rings. If a point arrives at which Steel rings become flattered then the production of the Steel rings should be stopped by the factory and remaining stock of Steel rings should be considered as sunk cost. Eventually with the passage of time, the company will start manufacturing and selling plastic rings only and future. All remaining stock related to steel rings will become sunk cost for the company. I believe that company management should take advantage of low cost of labor during low sales and off season in order to increase the units of Steel rings sold to customers.