Superior Manufacturing Company Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Superior Manufacturing Company

Q1.) Based on the 2004 statement of profit and loss data (Exhibits 1 and 2), do you agree with Waters’ decision to keep product 103?

Analysis of product one reveals that based on variable cost, product 103 generates contribution of $13.726/- million. Moreover, the avoidable fixed cost of producing product 103 is $8.793 million, i.e. general administrative cost, selling cost and indirect labor cost, therefore, product 103 generates net contribution of $4.933/- million through sales of 986,974/- units of product 103 during the year 2004. However, rest of the cost associated with product 103 is fixed cost and Super Manufacturing Company will have to bear this fixed cost regardless of its decision to produce product 103 or not. Currently product 103 incurs net loss of $2.209/- million, and if Super Manufacturing Company decides not to produce product 103, then it will incur additional loss of $2.671/- million through net contribution lost by product 103.

However, if product 103 is dropped then it will increase the net loss of Super Manufacturing Company to $3.359 million; therefore, Waters’ decision to keep the product 103 and use its contributions to cover the fixed cost is a good decision. (Appendix-A)

Q2.) Should SuperiorManufacturing Company lower as of January 1, 2006 its price of product 101? What will be the new price of product 101?

The fixed and variable cost structure of product 101 shows that 54% of its standard cost is fixed and 46% is variable. However, a decrease in product 101 sales units will result in lost contribution because the larger part of cost is fixed and Superior Manufacturing Company will have to bear the fixed cost regardless the number of units sold. Hence, the lower the number of sales units, the lesser will be the recovery of fixed cost, therefore, Superior Manufacturing Company is suggested to lower its price in order to increase number of sales units of product 101.( Appendix-B)

Pricing Decision

Based on alternate of sales price and quantity demand, Superior Manufacturing Company is suggested to a set the sales price at $20.50, by creating a demand of 1,250,000 units at net profits of $167,073/-

(Appendix-C)

Q3.) Why did Superior Manufacturing Company 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?

Analysis of the Exhibit 4 reveals that the main reason for improved profitability was the increased number of units sold during the first half of 2005 of product 102 and 103, 69% and 51% of the previous year respectively, hence, increasing the total contribution.

On the other hand fixed expenses, such as rent, insurance, depreciation and interest, are made through dividing actual cost over 12 months and then charging the 6 months cost to half year results, which seems to be logical. Ultimately, the increased contribution has not only covered the fixed cost but even contribution has crossed the fixed cost and has resulted in a net profit.

However, this half yearly profit is only because of the larger number of product 102 and 103 units sold during first half of the year and market conditions show that the sales of the whole industry would be weak during the second half of 2005 because the weakening industry during the second half of the Superior Manufacturing Company would not be able to sell enough number of units of product 102 and 103 to meet the same last years’ sold quantity. Moreover, the decreased number of sales unit will generate lower contribution which will not be able to cover the fixed cost during the second half of 2005, therefore; it can be said that Superior Manufacturing Company’s profitability during the first half of 2005 is temporary and in second half of 2005 it will incur losses which will compensate its first half profits.

Q4.) Why is it important that Superior Manufacturing Company has an effective cost system? What is your overall appraisal of the company’s cost system and its use in reports to management? List the strengths and weaknesses of this system and its related reports for the purposes management uses the system’s output. What recommendations, if any, would you make to Waters regarding the company’s cost accounting system and its related reports?

Importance of Effective Cost System for Superior

An effective costing system enables management to take informed decisions based on the planned and actual results of production costs. Moreover, an effective cost system helps management in understanding the cause of variances so they can take timely actions to control variances.

However, Superior Manufacturing Company operates in non growing, highly competitive market where low cost products are the key for success. Consequently, management of Superior Manufacturing Company needs an effective cost system in order to control the cost and offer its product at lower price than its competitors to slice the market share of its competitors.

Appraisal of Cost System and its Use in Management Reports

Generally, the outlook of cost report is not arranged in proper presentable format, additionally, it provide information on aggregate basis and no information is provided on the process involved in production of each unit............................

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