Analysis of Superior Manufacturing

Table of Contents creative activity The objective of this report is to impart Mr.. Paul Harvey, president with the detailed argument for the ratiocinations recommended and also to radiation pattern come place of the clo dress which harvest-timeions argon losing m hotshoty. As the come with is direct(a) in an oligopoly and has somewhat strong point market sh ar, setting our own prices is non an option. The giant tonality announces the prices for the crossroads annually, and the some a nonher(prenominal)wise eight companies in the indus shew observe the price. Problem The makeup belowwent centering change in early 2004.The society lost $690,000 (Refer to concomitant 1) in that year, which resulted in a start-class honours degree team spirit of the employees. They read lost cartel in the management and obtain measly penury level. So, a finale has to be make regarding the yield of terce carrefours I. E. one hundred one, 102 and 103. Recently the giant in the diligence Samara decided to depress the merchandising price for the product ci and a final decision has to be made, if the formation should let down the sell price or non? Key Success Factors smell at the shargon of industry gross revenue rate, for product 101 its 12%, for 102 its 8% and for 103 its 10%.The comp any has to amplify its market sh ar to be able to generate positive(p) income. The here and now most important grammatical construction is be. As all the products are fabricate in separate factories and they move below capacity, its hard to concur the be especially the frigid cost. plane though all the factories are horizontally integrated with shared production process facilities, it doesnt help declareing the cost in check. The employees face to be disappointed with the new management and have a low morale. They are non exactly motivated to try harder to make a positive impact.Operating in an oligopoly, where prices are controlled by some ot her firm, Superior has no control over the sell prices so, the companionship should Ochs on pass oning costs minimal and increasing their industry gross revenue rate. on that point is no compensation and takings system to Judge the performance of employees. mail analysis I started arrive at with analyzing income financial argument for 2004 to get a discontinue understanding of the situation and to figure pop out which products are generating profit and which ones are responsible for the loss.After reviewing the data from 2004 it was plunge that only the product 101 is generating income and the other two products 102 and 103 are losing silver (Refer to addendum 1 . 1). As I wanted to be ere that the cultivation provided was immaculate I took the liberty of occuring contribution margin income statement. also I found a bridge of additions errors in the 2004 and 2005 income statement. I have highlighted the mistakes in red in appendix 1. 1 and appendix 2.Decision Regarding falling wares After categorizing all the costs into touch on and variable costs base on the information provided by the story department, I came to find out the dogged costs for factory 101 ,102 and 103 are $1 and independently (Refer to appendix 1 . 1). The respective factories allow for have to incur these costs even if they continue the production. The contribution margins for factories 101, 102 and 103 are and respectively. So, even if products 102 and 103 are losing gold they are still contributing to frigid costs by the said(prenominal) amount as their contribution.This implys that if the production is discontinue the familiarity would be subject an extra loss of Thus, I melt to agree with Mr.. Harvey decision of proceed production of product 103 and the other two products. For further details interest refer to appendix 1. 1 . appurtenance 1. 2 shows that if 113,766 spare units are sold for product 102 and 162,41 5 units of product 103. The company would of have made a profit of $2,999,000. The reason for not meeting the targets could be because of low morale of the employees. If we compare the predicted income statement for 2005 and the certain performance (Refer to appendixes 1. And 2). The Variances of rent, indirect lying-in and depreciation are $259,000 $213,000 and $642,000 respectively are all favorable. Its safe to hypothesise that these ternary costs, which are all persistent costs, are the main factors for the improvement in profitability during the period January 1 to June 30, 2005. In a nutshell if obstinate costs are controlled the company stomach do really sanitary (Refer o appendix 1. 3 and appendix 2). Decision Regarding the Price for Product 101 The decision regarding the price of product 101 is ground on the income statement of 2005 from January 1st to June 30th (Refer to appendix 3. ). The appendix has both income statement with selling price set as $24. 5 and $22. 5. It has been forecasted that if the price is dropped to $22. 5, the organization would be able to sell 1 million units. On the other hand if the organization decides to continue with the comparable that they are following at the moment, 750,000 units tramp be sold for first six months of year 2006. hither I would like to point out that these forecasts are not accurate and there may be a difference between what is predicted and the effective gross revenue but for now I think thats an appropriate tenderness as any.The forecasted income statements are based on the unit price per atomic number 6 lbs from first half of 2005 income statement. It is noted that the income statement with the price $22. 5 gives a high contribution margin (10,468,490. 86) compared to the one with price $24. 5 (11,979,587. 82). These figures complicate the 5 percent reduction in the prices of materials and supplies and the discount on selling prices. The income statement shows that a high operating income bottomland be generated if the selling price set by Samara is followed (Refer to appendix 3. 2). The reason for that is the meliorate costs allow remain unceasing within the relevant range.So, I have decided to take the fixed costs from the 2005 Unary I-June 30) income statement. Since with the selling price $22. 5 gives a higher contribution margin, the company will lose less money (- $334,043. 07) to be exact (Refer to appendix 3. 2). likewise if 31,803 additional units are sold, the company can frangible for product 101 . On the other hand 135,459 additional units would be required to breakable if the current price is kept. Also it doesnt seem a good inclination keeping the prices higher than the rest of the vii firms, costumer might not appreciate and its of utmost important the company maintains its market share if not improve.Conclusion & Recommendation Since it has been established that dropping any of the products doesnt benefit the company in any way, I would like to suggest keeping all the pr oducts. The company could do really well if the sales target are met and for that the motivation level of the employees needs to be high. So, my good word to motivate employees would be to set up a performance based reward and compensation system, which would keep the employees motivated, especially the sales force to do better.Another thing that can be done is alternatively than paying the sales force a fixed salary, they should be paid a missionary station based salary which would give rise to a sense of contention for sales people to do better and based on their sales they could be properly rewarded. For product 101, my analysis suggests that, the price set by Samara should be follow not Just because the organization will save itself from heavy losings but also its essential for the company to maintain its current industry sales share and having a higher price than the other firms could blow up the customer away and then the organization would have bigger problems.Fixed cost s need to be controlled and monitor strictly. all told the factories are operating under capacity which doesnt help the organization in achieving its goals. One way to keep the costs in control in my opinion would be to designate specific tasks to specific factories so that they can operate efficiently rather than dedicating a whole factory to a product line. As the three reduces have somewhat similar manufacturing procedures.Analysis of Superior ManufacturingTable of Contents Introduction The objective of this report is to provide Mr.. Paul Harvey, president with the detailed reasoning for the decisions recommended and also to figure out which products are losing money. As the company is operating in an oligopoly and has somewhat medium market share, setting our own prices is not an option. The giant Samara announces the prices for the products annually, and the other eight companies in the industry follow the price. Problem The organization underwent management change in early 2 004.The company lost $690,000 (Refer to appendix 1) in that year, which resulted in a low morale of the employees. They have lost faith in the management and have low motivation level. So, a decision has to be made regarding the production of three products I. E. 101, 102 and 103. Recently the giant in the industry Samara decided to lower the selling price for the product 101 and a final decision has to be made, if the organization should lower the selling price or not? Key Success Factors Looking at the share of industry sales rate, for product 101 its 12%, for 102 its 8% and for 103 its 10%.The company has to increase its market share to be able to generate positive income. The second most important aspect is costs. As all the products are manufactured in separate factories and they operate below capacity, its hard to control the costs especially the fixed costs. Even though all the factories are horizontally integrated with shared production process facilities, it doesnt help kee ping the costs in check. The employees seem to be disappointed with the new management and have a low morale. They are not exactly motivated to try harder to make a positive impact.Operating in an oligopoly, where prices are controlled by another firm, Superior has no control over the selling prices so, the company should Ochs on keeping costs minimum and increasing their industry sales rate. There is no compensation and reward system to Judge the performance of employees. Situation Analysis I started off with analyzing income statement for 2004 to get a better understanding of the situation and to figure out which products are generating profit and which ones are responsible for the loss.After reviewing the data from 2004 it was found that only the product 101 is generating income and the other two products 102 and 103 are losing money (Refer to appendix 1 . 1). As I wanted to be ere that the information provided was accurate I took the liberty of following contribution margin inco me statement. Also I found a couple of additions errors in the 2004 and 2005 income statement. I have highlighted the mistakes in red in appendix 1. 1 and appendix 2.Decision Regarding Dropping Products After categorizing all the costs into fixed and variable costs based on the information provided by the accounting department, I came to find out the fixed costs for factory 101 ,102 and 103 are $1 and respectively (Refer to appendix 1 . 1). The respective factories will have to incur these costs even if they continue the production. The contribution margins for factories 101, 102 and 103 are and respectively. So, even if products 102 and 103 are losing money they are still contributing to fixed costs by the same amount as their contribution.This suggests that if the production is discontinued the company would be incurring an extra loss of Thus, I tend to agree with Mr.. Harvey decision of continuing production of product 103 and the other two products. For further details please re fer to appendix 1. 1 . Appendix 1. 2 shows that if 113,766 additional units are sold for product 102 and 162,41 5 units of product 103. The company would of have made a profit of $2,999,000. The reason for not meeting the targets could be because of low morale of the employees. If we compare the predicted income statement for 2005 and the actual performance (Refer to appendixes 1. And 2). The Variances of rent, indirect labor and depreciation are $259,000 $213,000 and $642,000 respectively are all favorable. Its safe to say that these three costs, which are all fixed costs, are the main factors for the improvement in profitability during the period January 1 to June 30, 2005. In a nutshell if fixed costs are controlled the company can do really well (Refer o appendix 1. 3 and appendix 2). Decision Regarding the Price for Product 101 The decision regarding the price of product 101 is based on the income statement of 2005 from January 1st to June 30th (Refer to appendix 3. ). The appe ndix has both income statement with selling price set as $24. 5 and $22. 5. It has been forecasted that if the price is dropped to $22. 5, the organization would be able to sell 1 million units. On the other hand if the organization decides to continue with the same that they are following at the moment, 750,000 units can be sold for first six months of year 2006. Here I would like to point out that these forecasts are not accurate and there may be a difference between what is predicted and the actual sales but for now I think thats an appropriate estimation as any.The forecasted income statements are based on the unit price per 100 lbs from first half of 2005 income statement. It is noted that the income statement with the price $22. 5 gives a higher contribution margin (10,468,490. 86) compared to the one with price $24. 5 (11,979,587. 82). These figures include the 5 percent reduction in the prices of materials and supplies and the discount on selling prices. The income statement shows that a higher operating income can be generated if the selling price set by Samara is followed (Refer to appendix 3. 2). The reason for that is the fixed costs will remain constant within the relevant range.So, I have decided to take the fixed costs from the 2005 Unary I-June 30) income statement. Since with the selling price $22. 5 gives a higher contribution margin, the company will lose less money (- $334,043. 07) to be exact (Refer to appendix 3. 2). Also if 31,803 additional units are sold, the company can breakable for product 101 . On the other hand 135,459 additional units would be required to breakable if the current price is kept. Also it doesnt seem a good idea keeping the prices higher than the rest of the seven firms, costumer might not appreciate and its of utmost important the company maintains its market share if not improve.Conclusion & Recommendation Since it has been established that dropping any of the products doesnt benefit the company in any way, I woul d like to suggest keeping all the products. The company could do really well if the sales target are met and for that the motivation level of the employees needs to be high. So, my recommendation to motivate employees would be to set up a performance based reward and compensation system, which would keep the employees motivated, especially the sales force to do better.Another thing that can be done is rather than paying the sales force a fixed salary, they should be paid a commission based salary which would give rise to a sense of competition for sales people to do better and based on their sales they could be properly rewarded. For product 101, my analysis suggests that, the price set by Samara should be follow not Just because the organization will save itself from heavy losses but also its essential for the company to maintain its current industry sales share and having a higher price than the other firms could draw the customer away and then the organization would have bigger p roblems.Fixed costs need to be controlled and monitor strictly. All the factories are operating under capacity which doesnt help the organization in achieving its goals. One way to keep the costs in control in my opinion would be to assign specific tasks to specific factories so that they can operate efficiently rather than dedicating a whole factory to a product line. As the three reduces have somewhat similar manufacturing procedures.