Superior Manufacturing Company

Topics: Variable cost, Cost, Costs Pages: 6 (1182 words) Published: November 22, 2014
Case Study - 4. Superior Manufacturing Company
Description: The Superior Manufacturing Company received a net loss income statement for a good business year (2004). The Company has only 3 products and lots of competitors with similar products. The manager thinks the product 103 should be dropped for its high cost which could not be cut down, and the product 102 has an increasing demand. Also, the managers want to make a price reduction. However, they find that the costs are too high to support the price reduction. Does the cost system of Superior Manufacturing Company work effectively? QUESTION - 1. Based on the 2004 statement of profit and loss data (Exhibits 1 and 2), do you agree with Waters’s decision to keep product 103? Firstly, we calculate the loss of drop of product 103. We use the data of 2004.  

 
 
Total Costs on Product 103
If drop
 
 
 
 
Variable Costs
Fixed Costs
Product 103
Difference
 

 
 

 
Rent
F
1882
0
1882
1,882
0
Property Taxes
F
401
0
401
401
0
Property Insurance
F
534
0
534
534
0
Compensation Insurance
V
458
458
0

-458
Direct Labor
V
6879
6879
0

-6,879
Indirect Labor
F
2309
0
2309

-2,309
Power
V
302
302
0

-302
Light & Heat
F
106
0
106
106
0
Building Sevice
F
75
0
75
75
0
Materials
V
4851
4851
0

-4,851
Supplies
V
350
350
0

-350
Repairs
V
104
104
0

-104
Selling Expense
F
4701
0
4701

-4,701
General Administrative
F
1783
0
1783

-1,783
Depreciation
F
3658
0
3658
3,658
0
Interest
F
539
0
539
539
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Expenses

28932
12944
15988
7195
-21737
Sales

26670
 
 
0
-26,670
Profit or Loss
 
-2262
 
 
-7195
-4933

If we drop 103, the operating loss would be 4,933,000. It is obvious that at least in short and mid-term period stopping the production would bring much bigger losses than continuing it. Therefore we can’t recommend this as a good solution of the situation. Therefore, the company should keep Product 103. Considering that the manufacturing facilities operate below capacity by increasing the production and sales the item 103 may become profitable.. For this purpose it is necessary to find a break-even point and consider the production above that unit number. Break-even point for product 103

1,000
Total
Per Unit

Cost per item
28.93

Sales
27,500
27.50

Variable expenses
-12,944
-12.94

Sales Price
27.5

Contribution margin
14,556
14.56

Fixed expenses
-15,988

Unit number step
100

Net operating income
-1,432

in terms of Unit Sales (quantity)

Sales

Break-even point

Break-even point
=
Fixed Expenses
=
15,988,000
=
1,098,379
Units
 

Unit CM

14.6

 

CVP Diagram

Unit Sales
Fixed Costs
Variable Costs
Total Costs
 
Sales Rev.
Profit
0
15,988
0.00
15,988
>
0
-15,988
100
15,988
1,294.40
17,282
>
2,750
-14,532
200
15,988
2,588.80
18,577
>
5,500
-13,077
300
15,988
3,883.20
19,871
>
8,250
-11,621
400
15,988
5,177.60
21,166
>
11,000
-10,166
500
15,988
6,472.00
22,460
>
13,750
-8,710
600
15,988
7,766.40
23,754
>
16,500
-7,254
700
15,988
9,060.80
25,049
>
19,250
-5,799
800
15,988
10,355.20
26,343
>
22,000
-4,343
900
15,988
11,649.60
27,638
>
24,750
-2,888
1,000
15,988
12,944.00
28,932
>
27,500
-1,432
1,100
15,988
14,238.40
30,226
<
30,250
24
1,200
15,988
15,532.80
31,521
<
33,000
1,479
1,300
15,988
16,827.20
32,815
<
35,750
2,935
1,400
15,988
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