DE LA SALLE UNIVERSITY

Graduate School of Business

PRECISION WORLDWIDE, INC.

Submitted by:
Roy Anthony A. Ventura, CPA
Master of Business Administration
ID# 11585528

In Partial Fulfilment
of the Course Requirements In Management Accounting
Term 3, AY 2015-2016

ACC535M GMF

Submitted to:
Dr. Jose Lauro B. Cruz

20 August 2016

SYNTHESIS
 Precision Worldwide Inc. is a company that manufactures industrial machines
and equipment for sale in numerous countries. The company has been
manufacturing steels for nearly 90 years. The companys head office is in Ohio,
USA. PWIs plants outside the United States are given autonomy in making decisions
to a certain degree. Personnel from their head office was easily accessible through
phone calls, emails, and through executive visits.
In May 2004, Hans Thorborg, the General Manager of the German Plant of
Precision Worldwide, Inc. (PWI) discussed an introduction of the French Firm Henri
Poulenc (a competitor) of a plastic ring substitute for the steel retaining rings
presently used in certain machines sold by Precision Worldwide. The plastic ring had
much lower manufacturing cost and had a much longer life compared to that of the
steel rings. Thorborgs problem was there are large quantity of steel rings on hand.
The special steel could not be sold, even for scrap value.
The dilemma of Thorborg was made only at the companys plant in Frankurt,
Germany. Different models were priced between $ 18,000 and $28,900 and were
sold by a separate sales organization. Repairs and replacement parts were sold
separately. In 1990, competition had increased. Japanese firms with low-priced
spare parts, had successfully entered the field. The steel rings manufactured by PWI
had a normal life of about 2 months, depending on the usage.
The sales manager, Gerhard Henk, asked PWI when they would be able to
manufacture plastic rings for sale to customers in France and to compete with the
French Firm Henri Poulenc. The development engineer had estimated that the
plastic ring could be produced by mid-September of 2004. Necessary tools and
equipment could be obtained for about $ 7,500. There would be inventory of steel
rings on hand that could not be used by September.
Henri Poulenc (the competitor) are selling his plastic rings at about the same
price as the PWI Steel ring. PWI then decided to produce the plastic ring soon but
that until the inventories of the old model and the steel were exhausted, the plastic
rings would only be sold in those markets where it was offered by the competition.
Patrick Corrigan is interested in the problem faced by the German Plant.
Corrigan agreed to proceed with plans of producing plastic rings and find some
other use for the steel. The selling price of the steel rings is $ 1,350 per hundred.
Thorborg learned that inventory of special steel had a cost of $ 110,000 and
represented enough materials to produce approximately 34,500 rings. 15,100
finished rings will be left on hand by mid-septmeber. During slack periods, the
company employed a policy of employing excess labor about 70% of regular wages.

FACTS OF THE CASE

Models were priced between $ 18,000 and $28,900 and were sold by a
separate sales organization
The plastic ring had much lower manufacturing cost and had a much longer
life compared to that of the steel rings
Japanese firms with low-priced spare parts, had successfully entered the field.
The development engineer had estimated that the plastic ring could be
produced by mid-September of 2004
Necessary tools and equipment could be obtained for about $ 7,500
 There would be inventory of steel rings on hand that could not be used by
September.
PWI then decided to produce the plastic ring soon but that until the
inventories of the old model and the steel were exhausted, the plastic rings
would only be sold in those markets where it was offered by the competition.
The selling price of the steel rings is $ 1,350 per hundred.
Thorborg learned that inventory of special steel had a cost of $ 110,000 and
represented enough materials to produce approximately 34,500 rings.
15,100 finished rings will be left on hand by mid-septmeber.
The cost of both plastics and steel rings are as follows:

Below is a comparison of the profit for Steel Rings and Plastic Rings

POINT OF VIEW

This case should be taken from the perspective of Hans Thorborg, the general
manager of the German Plant of Precision Worldwide, Inc. which has a dilemma of
how to do with the huge inventories on hand taking into account that there is
already a superior ring player in the market which is made up of plastic.
THEORETICAL FRAMEWORKS

The proposed costing method was Variable Costing over Absorption Costing.
Product cost under Variable Costing consist of Direct Materials, Direct Labor, and
Variable Overhead as shown in figure 4.

Figure 4. Differences of product costs under absorption costing and

variable costing

Another theory that was adopted in this paper was the vertical analysis which
expresses the line item as a percentage of some other line item for the same
period. It is concerned with the relationships among items within a particular time
period (Mowen et al., 2014). In this theory, we can see the relationship of cost of
sales to net sales in terms of percentage.

AREAS OF CONSIDERATION

Manufacturing cost of steel rings

Equipment that will be used in producing plastic rings

STATEMENT OF THE PROBLEM

What should PWI do with the huge inventories of steels on hand? What are the
possible ways to maximize the use of steel inventories? When should they start
manufacturing the plastic rings?

OBJECTIVES

To be able to come up with the product cost of the plastic rings

To be able determine the other use of steel rings inventory on hand by mid- -
September

ALTERNATIVE COURSES OF ACTIONS

ACA Advantage Disadvantage

Give 45% discount on Steel This will give customer a Low income realized by the
Rings. reasonable discount just to company
exhaust inventories on
hand because of the
emergence of a new
technology, the plastic
rings

Give 70% discount on Steel Inventories on hand will be Low income realized by the
Rings. exhausted in a short time company

This will give the customer

to very large discount

No Discount High Margin No certainty of exhausting all

the inventories on hand

ACA ANALYSIS

ACA #1. Give 45 % Discount on Steel Rings

This will give the customer to enjoy a 45% discount on sales for steel rings.
The computation below will show the profit / loss if the company opted to choose
this ACA.

As we can see, there is still a positive contribution margin of P66.90 which is

very lean. This may not cover the fixed expenses but it still has a contribution
margin which can be a basis for decision.

ACA #1. Give 70 % Discount on Steel Rings.

This will give the customer to enjoy a 70% discount on sales for steel rings.
The computation below will show the profit / loss if the company opted to choose
this ACA.
 As we can see, contribution margin is already negative. Thus, we cannot give
this amount of discount to the customers. Much that we want to exhaust all the
steel rings inventory on hand, we cannot just sell it to a very low contribution
margin.

ACA #3. No Discount.

If the company opted to choose this ACA, there is no certainty that the
inventories on hand will be exhausted. If the inventories on hand will not be
exhausted, it will just incurr cost of handling, the compnay will now soon
manufacture plastic rings.

DECISION CRITERIA

Decision Criteria Weigh ACA ACA ACA2

t 1 2

Profitability 30 % 30 25 20

Contribution Margin 40 % 35 30 25

Cost 30 % 25 20 25

100 % 90 % 75 70 %
%
RECOMMENDATION

I recommend ACA 1, to give discount to customers amounting to 45%. Having

so lean profit under this ACA, it is not sufficient to cover fixed expenses but the
thought of exhausting all steel rings inventories on hand would be a good deal.
Rather than giving no discount at all, there is no certainty that the inventories for
steel ring on this option will be exhausted. Thus, incurring more costs to carry and
incurring more fixed costs.

REFERENCES

Leong, C. H. (2012, July 22). Jackie's Point of View. Retrieved from Absorption Vs
Variable Costing (Critical Review):
http://hoileongchan.blogspot.com/2012/07/absorption-vs-variable-costing-
critical.html
Locsin, A. (n.d.). The Average Profit Margin for a Restaurant. Retrieved from Small
Business: http://smallbusiness.chron.com/average-profit-margin-restaurant-
13477.html