Case Study for Precision Worldwide, Inc
Case Study for Precision Worldwide, Inc.
Solution
Considering the option of continuing production of steel rings or switching to plastic rings, incremental analysis demonstrates plastic rings will decrease cost while decrease increasing profit.
Table 1
Alternative 1
Alternative
(per hundred)
plastic
steel
Selling price
1,350.00
1,350.00
Rings sold per week
6.90*
6.90*
Revenue per week
9,315.00
9,315.00
Incremental revenue
Manufacturing Cost
279.65
1,107.90
Cost per week
1,929.59
7,644.51
-5,714.93
Incremental cost
Profit
7,385.42
1,670.49
5,714.93
Incremental Profit
The company sells 690 rings per week. Since cost calculations are in hundreds, price ($1,350) is multiplied by 6.90 (690/100) to obtain revenue generated per week. Manufacturing cost is also multiplied by 6.90 to compute cost per week.
Incremental revenue between Plastic and Steel is zero. This results from the company charging the same price for both products. Incremental cost decreases by $5,714.93, likewise yielding an incremental profit of $5,714.93 per week, which equals $297,176.36 incremental profit a year!! This data suggests it is important to start manufacturing on new plastic rings as soon as the new equipment becomes available; the projected time frame is September.
The additional profit between plastic and steel rings derives from the decrease in manufacturing cost.
Table 2
Manufacturing Costs (per hundred rings)
Table A
Plastic
Steel
Difference
(Plastic – Steel)
material
17.65
321.9
-304.25
direct labor
196.5
overhead
.80/$DL
.80/$DL
departmental
administrative
196.5
total cost
279.65
1,107.90
-828.25
A break down of expenditures points to a large gap in manufacturing costs between plastic and steel. Variable costs, material and direct labor, are reduced $435.25 by converting to plastic as well as a $393 reduction of departmental and administrative fixed costs.
Table 3
Profitability