Precision World Wide Inc. wants to determine whether they should introduce a new Japanese prototype to their steel ring. This new ring which is made out of plastic is tougher and less costly to produce. By producing these plastic rings, Precision worldwide would go out of business if some form of action is not taken. One big issue is the level of steel rings that they currently have in their inventory.
These rings cannot be sold for any value including scrap.The reason for having so much inventory is the result of having to order the highly specialized steel in large amounts so that a mill would be willing to handle the order. As far as this issue, Thorborg needs to realize that the cost of the steel rings in inventory is a sunk cost. With sunk costs, the cost becomes irrelevant because it cannot vary with the decision to produce plastic rings. A lot of times, managers are too scared or not willing to give up on a decision because they have invested so much into it.They need evaluate the decision based on what is a better more profitable product to produce regardless of what was already a sunk cost.
Thorborg, also needs to properly handle the inventory and be very strategic in the way he sells the steel rings considering that he will have 15,100 finished rings would be left on hand by mid-September when the plastic rings roll out. Thorborg would be better off if he sold as many steel rings as possible prior to the production of the plastic rings.One strategy he can implement would be to price discriminate and sell to low value consumers at a discounted rate which will increase sales of the steel rings. He can talk to Henk which is the sales manager to come up with drastic price reductions and reduce steel ring inventory.
Once all inventory is exhausted, produce all plastic rings. Another strategy would be to sell steel rings until the plastic rings are ready for the market, then sell the steel rings at a discount and sell plastic rings at the same time.With this option, you must emphasize to the market that plastic rings are tougher which reflects on the price. You can also just sell steel rings and do not consider selling plastic rings at all.
This option does not prepare the company for long term financial success because the profit margins are a lot higher for plastic rings. Also, you can just produce plastic rings and scrap all of you inventory. This option would not consider the opportunity cost of the excess steel rings inventory.