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Sup Manuf Company Final Draft

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Management Control Systems IBM Analysis

POLITECNICO DI MILANO

Master of Science inManagement, Economics and Industrial Engineering

Management Control SystemsProf. Paolo Maccarrone

Second Assignment: AnalysisGroup

Ferrario Andrea

Rognoni Susanna

Taiana Marco

Trifonov Angel

A.Y. 2007/2008Q1 XE "Q1" .Based on the 2004 statement o TC "Q1.Based on the 2004 statement o" \f C \l "1" f profit and loss data (Exhibits 1 and 2), do you agree with Waters decision to keep product 103?In order to support an opinion on the side we decided to analyze all the probable scenarios.

If the company management decided that it is better to stop the production of product 103, they could do this in one of the following manners:1. Stop production and any business related to product 103.2. Stop production but outsource it to another company and continue the distribution.3. Stop production and use the available production capacity in order to produce product 101 or 102.If the company management decided that it is better to continue the production of product 103, they could do this in one of the following manners:

1. Maintain the same volume of production.2. Increase the volume of production. 3. Lower the volume of production.4. Substitute 102 production capacity with 103 if the 103 facility has not sufficient capacity to exploit economies of scaleAnalysis of the P&L statement of 31 December 2004 TC "Analysis of the P&L statement of 31 December 2004" \f C \l "2" If we have a look at the P&L statement for the 2004 it is obvious that product 103 is bringing substantial losses. The calculations show that there is a loss of 2.16\$ per unit sold which overall totals for the amount sold to at about 2.209 million \$.

A closer look at the costs attributed to product 103 shows the following.Costs division: Direct/Indirect (000)

DirectIndirect

Direct Labor(v) \$ 25.921,00 Rent(non v) \$ 5.324,00

Materials(v) \$ 17.208,00 Property Taxes(almost non v.) \$ 1.525,00

Supplies(v) \$ 1.360,00 Property Insurance(non v) \$ 1.463,00

Repairs(v) \$ 438,00 Indirect Labor \$ 8.846,00

Compensation Insurance(v) \$ 1.296,05 Light & Heat(almost non v,fuel dep.) \$ 394,00

Power(v) \$ 773,00 Building Sevice(non v) \$ 266,00

Compensation Insurance(non v.) \$ 442,30

Total:46996,05Total: \$ 18.260,30

Percentage of the total cost:72%28%

Total Cost \$ 65.256,35

The size of the indirect non variable costs is quite high. It amounts for 28% of all the costs. If we keep in mind this information and reason on the statement of the management that the production facility is normally working under its full capacity we could suggest that there is a possibility of benefitting from economies of scale.If we assume this possibility and plot the change in price related to the change in production volume we get the following:

Compen Ins(v)Direct Labor(v)Power(v)Materials(v)Supplies(v)Repairs(v)volume

\$ 209,09 \$ 4.181,87 \$ 183,59 \$ 2.949,01 \$ 212,77 \$ 63,22 600

\$ 226,52 \$ 4.530,36 \$ 198,89 \$ 3.194,77 \$ 230,50 \$ 68,49 650

\$ 243,94 \$ 4.878,85 \$ 214,19 \$ 3.440,52 \$ 248,23 \$ 73,76 700

\$ 261,37 \$ 5.227,34 \$ 229,49 \$ 3.686,27 \$ 265,96 \$ 79,03 750

\$ 278,79 \$ 5.575,83 \$ 244,79 \$ 3.932,02 \$ 283,70 \$ 84,30 800

\$ 296,22 \$ 5.924,32 \$ 260,09 \$ 4.177,77 \$ 301,43 \$ 89,57 850

\$ 313,64 \$ 6.272,81 \$ 275,39 \$ 4.423,52 \$ 319,16 \$ 94,84 900

\$ 331,06 \$ 6.621,30 \$ 290,69 \$ 4.669,27 \$ 336,89 \$ 100,10 950

\$ 348,49 \$ 6.969,79 \$ 305,99 \$ 4.915,02 \$ 354,62 \$ 105,37 1000

\$ 365,91 \$ 7.318,28 \$ 321,29 \$ 5.160,77 \$ 372,35 \$ 110,64 1050

\$ 383,34 \$ 7.666,77 \$ 336,58 \$ 5.406,53 \$ 390,08 \$ 115,91 1100

\$ 400,76 \$ 8.015,26 \$ 351,88 \$ 5.652,28 \$ 407,81 \$ 121,18 1150

\$ 418,19 \$ 8.363,75 \$ 367,18 \$ 5.898,03 \$ 425,54 \$ 126,45 1200

\$ 435,61 \$ 8.712,24 \$ 382,48 \$ 6.143,78 \$ 443,27 \$ 131,72 1250

\$ 453,04 \$ 9.060,73 \$ 397,78 \$ 6.389,53 \$ 461,01 \$ 136,98 1300

Other IncomeFixed CostsSGDI

\$ 51,00 \$ 5.423,44 \$ 10.681,00

volumeunit priceSalesProfit(Loss) p. unitProfit(Loss) total

600 \$ 39,76 \$ 16.212,90 \$ -12,73 \$ -7.640,11

650 \$ 37,70 \$ 17.563,98 \$ -10,68 \$ -6.939,00

700 \$ 35,93 \$ 18.915,05 \$ -8,91 \$ -6.237,88

750 \$ 34,40 \$ 20.266,13 \$ -7,38 \$ -5.536,77

800 \$ 33,07 \$ 21.617,20 \$ -6,04 \$ -4.835,66

850 \$ 31,89 \$ 22.968,28 \$ -4,86 \$ -4.134,55

900 \$ 30,84 \$ 24.319,35 \$ -3,81 \$ -3.433,44

950 \$ 29,90 \$ 25.670,43 \$ -2,88 \$ -2.732,33

1000 \$ 29,05 \$ 27.021,50 \$ -2,03 \$ -2.031,22

1050 \$ 28,29 \$ 28.372,58 \$ -1,27 \$ -1.330,11

1100 \$ 27,59 \$ 29.723,65 \$ -0,57 \$ -629,00

1150 \$ 26,96 \$ 31.074,73 \$ 0,06 \$ 72,11

1200 \$ 26,38 \$ 32.425,80 \$ 0,64 \$ 773,23

1250 \$ 25,84 \$ 33.776,88 \$ 1,18 \$ 1.474,34

1300 \$ 25,35 \$ 35.127,95 \$ 1,67 \$ 2.175,45

It is obvious that for volumes higher than 1 150 000 product 103 is actually profitable. These calculations are made without taking into consideration the expected 5% diminishment of the prices of materials and supplies in 2006.

(did not take into consideration the change of price of sales, admin, indirect labor)Sensitivity analysis TC "Sensitivity analysis" \f C \l "2" In order to make recommendations for a possible strategic course of actions we need to take in consideration the variance of some key indicators.

These are:

1. The operating capacity of the facility and the level at which it operates now.

2. Possible changes on the market volume and companys market share(expected reactions from the competitors)

3. Potential savings

4. Inventory costsStrategic scenarios TC "Strategic scenarios" \f C \l "2" Having in mind the analysis of the current situation we could offer some scenarios for strategic actions to the management of Superior Manufacturing.

Referring back to the first paragraph we can explore the following options:

Stop the production of product 103:

1. Stop production and any business related to product 103.2. Stop production but outsource it to another company and continue the distribution.3. Stop production and use the available production capacity in order to produce product 101 or 102.1. Stopping the production of product 103 in the current situation would mean that the company will no longer produce a non profitable product. This will bring to avoiding a possible potential loss of at about 2.2 million \$ assuming expected sales of 1million units.On the other hand it will bring as a loss all the non variable, fixed expenses, missed sales profit, restructure of the workforce etc. To calculate these we assume that in short term, i.e. for the next operating cycle (year 2005) the company will:

a. continue to pay all the fixed expenses

b. not sell the machinery

c. totally reduce the directly occupied working force

d. still need at about 10% of the indirectly occupied workforce and general administration in order to secure and maintain the operations still related to the rented and possessed property.

Rent(non v) \$ 1.882,00 \$ 1.882,00

Property Taxes(almost non v.) \$ 401,00 \$ 401,00

Pro