Superior Manufacturing Questions

Superior Manufacturing

Questions 1. Q - 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? A - In order to determine if I agree with Walter’s decision to keep product 103, I used a couple of different tools we learned from the text to understand the impact this decision could have over the entire company. My analysis can be seen on the “Question 1” tab in the excel spreadsheet I submitted with my response. First, I completed a simple Contribution Margin analysis to understand if product 103 was truly profitable or not. After completing the analysis, it can be seen that product 103 has a contribution margin of 51%. In comparison, products 101 and 102 have contribution margins of 57% and 53% respectively. Therefore I conclude that although product 103’s contribution margin is lower, it is still relatively consistent with other products within the company’s portfolio, and dropping the product may not be in the company’s best interest. Next, I dug a little deeper into the data to examine the potential gains or losses that the company would experience if they did indeed drop the product. I created an income statement, also found on the “Question 1” tab, where I removed Sales, Variable Costs, and a few fixed costs that I thought would go away if the product was discontinued, such as the selling expense or administrative costs that applied to that product. Fixed costs such as rent, property tax, light & and heat, and building services all remained in the income statement as they will be present regardless if product 103 is produced. The result was that “Factory 103” would now experience roughly a $7.2 Million loss due to the fixed costs that remain with no sales or revenue to offset those costs. In comparison, by producing product 103, factory 103 experienced a loss of roughly $2.2 Million. Therefore, by eliminating product 103, I estimate that Superior manufacturing’s losses would increase by...