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?
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 scale
Analysis of the P&L statement of 31 December 2004
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) | |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% |...
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