Superior Manufacturing Co. Case Study Solution
This report will provide the solutions to the problems occurred at Superior Manufacturing Company.As the company is facing intense financial crises due to which costing system has been targeted to change. Therefore, management of the company had introduced standardized costing system. To analyze this newly introduced costing system,strengths and weaknesses of respective system have been discussed and the recommendations to overcome problems and to prevent company from such crises have also been made. Moreover, the sales of company have also been analyzed by decreasing or increasing revenues at some extent in order to identify the valuation of different product and the worth of products that is adding value to the company. Moreover, this analysis also discusses the shortage of cost which would be needed in order to fulfill the loss that is being faced by the company.
Lastly, Appendices show the level of profitability of all product lines. Moreover, it also shows the effects of selling 100,000 additional units to each product line.
Keywords: crises, management, sales, costing system
Introduction
Superior manufacturing company develops three industrial products named as product 101, 102 and 103 respectively. The management of the company is handed over to an un experienced son due to tragic death of his father, who is owner of the company. Due to his lack of knowledge and management experience, the company lead to failures and resulted in continuous losses.To overcome these losses, the new owner has decided to hire an experienced manager. Consequently, manager of a competitor was hired by giving the incentive of shares and capital ownership.
The newly hired manager focused mainly on costing of product. The pricing of products was set on a very minimum level of profit. A very simple costing structure was used which includes all direct and indirect costs applied to respective products. Costs of each product was calculated separately. All direct costs were applied directly and indirect costs were applied on the basis of square feet and other determinants.However, the company was generating profit on only one product out of three.
Superior Manufacturing Co. Harvard Case Solution & Analysis
As a result of new management, new strategic costs were applied to the company. Consequently, the company started generating positive results shown in mid-year analysis. Moreover, the company generated two options in order to help the company to retrieve from crises. Either the company should drop product 103 which is resulting in maximum loss and least selling unit or in order to compete the highest competitor, it should decrease its price. Therefore, following analysis have been generated.
Analysis
To analyze the crises being faced by the company, following questions have been answered:
Question 1: 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?
Water has decided not to drop product 103. However, as per the data that have been given in Exhibit 1&2, it has been analyzed that there would be no agreement with the Water’s decision as the Product 103 has highest cost than other two products. All indirect costs and direct costs have more impact on development of Product 103. Moreover, the number of units sold of this product line is also lesser than other two products.
Despite of the highest selling price of this product, revenue generated through Product 103 is lesser than other two products. Consequently, the net loss of Product 103 is the highest among all products. Therefore, the company should withdraw this product and use same resources to concentrate on other product’s development so that less cost is implemented on other products and company could generate higher profits.
Question 2:
Should Superior lower as of January 1, 2006 its price of product 101? To what price?
As the industry is facing a competitive environment, and the company’s biggest competitor is decreasing its price of Product 101 to$22.50.However, the company is earning a small amount of $1.40 on its product. Moreover, it’s the only product line in which company is operating positively.
However, to compete with Samra Company, Superior Manufacturing have a margin of $1.40, which can be forgiven in order to have a strong competition in the market. But, if the company would sell its product on cost that is $22.88, it cannot reach to competitors selling price. Therefore, company should apply any strategy to decrease its cost and to compete strongly in the market.
Question 3:Why did Superior improve profitability during the period January 1 to June 30, 2005? How useful was the data in Exhibit 4 for the purpose of this analysis?
As the traditional cost system was changed and standard cost system was introduced in early 2005, it improved the profitability of the company. Under this cost system, standard cost per unit was based on last fiscal year’s actual cost per unit, in which anticipated costs were adjusted. Per unit standard cost determines a finished product of 100 lb......................
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