superior manufacturing company

Topics: Cost accounting, Cost, Costs Pages: 24 (4195 words) Published: December 7, 2013
CONTENTS

Analysis of the case2
Q1) Do you agree with Walters decision to keep product 103?3 Analysis of Profit and loss statement 4
Sensitivity analysis6
Strategic scenarios8
Q2) Should superior lower as of January 1, 2006 its prices of product 101? To what price?10 Q3) why did Supreme improve profitability during the period of January 1 to June 30, 2005?13 Analysis14

Q4) why is it important that Superior has an effective cost system? 17 What is your overall appraisal of the company’s cost system and its use in report to management18 List the strengths and weaknesses of the system and its related reports for the purpose management uses the system’s output18 What recommendations, if any, would you make to waters regarding the company’s cost accounting system and its related reports?19 Initial Analysis of Superior Manufacturing Company Case :-

1) After death of Richard Harvey (2004), founder and president of Superior Manufacturing Company (SMC), Paul Harvey took over. Paul Harvey had only 4 years of experience. Soon followed serious management problems because of some bad decisions made by Paul Harvey. The income statement of 2004 reflected net loss of $0.68million in a good business year. To solve this problem Herbert Waters was brought over as General Manager of SMC. 2) SMC manufactured 3 different products namely 101, 102, 103 and was among the top 8 companies in the industry. Samra Company was market leader and announced price annually and other follow. Due to no product differentiation price cut was not an option. The June 2004 market share of SMC product wise is given below; Products

101
102
103
Market share
12%
8%
10%
Price per 100lbs
24.5
25.8
27.5

3) SMC had a dedicated factory concept, where each factory produces only one product. Each product factory was fully horizontally integrated. SMC all plants operated below capacity. 4) SMC followed a simple cost system, which identified two categories of cost :- a. Direct Cost to manufacturing of specific product (direct labour, materials, suppliers, retailers) b. Indirect Cost (rent, property taxes, material cost etc.)

5) As SMC product was sold in 100lbs bags all cost are expressed in terms of 100 pounds. 6) Paul Hervey after studying the reports generated by standard cost system stated that product 103 should be dropped immediately, as it would be impossible to lower expenses on product 103 as much as $2.16 per 100 pounds. But Herbert Waters exercised his administrative control and continued production of the three products. 7) In July 2005, six months statement of cumulative standard costs including variances of total company actual costs from standard, showed first half of 2005 has been a successful period. 8) During second half of 2005, entire industry sales weakened. Samra Company announced a price reduction (1 January, 2006) on product 101 from $24.5 to $22.5 per 100 lbs. This decline was a huge risk from for SMC’s most successful product. The prices will make the best product unprofitable. The two other products sold by SMC were already unprofitable. 9) The business production strategy and cost system employed by SMC does makes differentiation between indirect costs associated with each factory. Indirect costs constitutes for major part of the costs attributed to each product. 10) In 2005, SMC was faced with a financial decision related to continue production on all three of their factories or stop the least profitable one, product 103. With this they also had to decide whether to lower the price of their product 101 to match market leader Samra’s price.

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?

The analysis of all the probable scenarios are given below:-

Scenario 1
If management decides to stop product 103, this can be achieved by: 1. Stop product 103 and all business related to it.
2. Outsource production of product...
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