# Superior Manufacturing Company Case Study

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POLITECNICO DI MILANO

Master of Science in

Management, Economics and Industrial Engineering

[pic 1]

Management Control Systems

Prof. Paolo Maccarrone

Second Assignment: Analysis

Group

Ferrario Andrea

Rognoni Susanna

Taiana Marco

Trifonov Angel

A.Y. 2007/2008

## Q1.Based on the 2004 statement of profit and loss data (Exhibits 1 and 2), do you agree with Water’s decision to keep product 103?

We need to evaluate the financial analysis for all scenarios.

If the management chooses to stop the production of product 103, they can achieve this in one of the following ways:

1. Stop production and any activity related to product 103.
2. Outsource product 103 to another company and continue on distributing it without production.
3. Use the current capacity of production to produce product 101 or 102 and stop producing 103.

If the management chooses to continue producing product 103, they can do it in one of the following ways:

1. Keep the same current volume of production.
2. Increase the volume of production.
3. Decrease the volume of production.
4. Distribute the production capacity of product 102 with 103 if the 103 factory has no enough capacity to make use of economies of scale

### Analysis of the P&L statement of 31 December 2004

If we take a look at the P&L statement for the year 2004 it is noticeable that product 103 is resulting in considerable 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) Direct Indirect 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: 46996,05 Total: \$                    18.260,30 Percentage of the total cost: 72% 28% Total Cost \$                                               65.256,35

The amount of the indirect costs is high. It contributes to 28% of the total costs. Taking this information into consideration we might advise that there is an opportunity to benefit from the economies of scale.

Assuming that this opportunity 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

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