Superior Manufacturing Company Case

Managerial Accounting

Superior Manufacturing Company

Q1: Base on the 2004 statement of profit and loss data, do you agree with Water’s

decision to keep product 103?

According to the concept of managerial concept, production distribution should

follow the concept of margin profit, which is contribution margin that deducts

variable cost from sales price. Since product 101, 102 and 103 shared total fixed cost

of the factory, the variable cost of each is much more important when deciding the

production volume. Maximizing the volume of most profitable product will help the

company not only to cover fixed cost but also to increase operating income. Thus the

decision should base on the variable costing instead of absorbing costing shown as

exhibit 2.

By dividing cost from exhibit 2 into variable cost and fixed cost according to the

definition given in exhibit 3, we could calculate the contribution margin by unit of

each product, which are $13.76, $13.46 and $13.92 respectively. The result indicates

that product 103 possess the highest profitability by unit. Thus, Superior Company

should keep produce product 103 in order to maximize operation income.

Product 101 Product 102 Product 103

Sales (Net) 24.24 25.23 27.03

Compensation Insurance 0.39 0.42 0.46

Direct Labor 6.06 5.92 6.97

Power 0.11 0.24 0.31

Materials 3.59 4.58 4.91

Supplies 0.25 0.46 0.36

Repairs 0.08 0.15 0.10

Total variable cost (10) (12) (13)

Contribution Margin 13.76 13.46 13.92

Q2: Should Superior lower as of January 1, 2006 its price of product 101? To what

price?

In order to decide whether to lower the price, we should calculate the profit

structure by different price and volume. Fixed cost remains the same as $1,232,117,

which is the sales volume (996,859) multiples fixed cost of product 101 ($12.36).

Price Volume Discount VC CM FC Operating Income

No Price Down $24.5 750,000 22.23 10.5 13.76 1,232,117 -2,004,627

Price Down $22.5 10,00,000 22.25 10.5 11.78 1,232,117 -544,177

From the above chart, we could find that the operating income increases while

price going down. Although operating profit remains negative, the volume increased

by price down could still compensate the loss from production. Therefore, Superior

Company should lower the price.

To find the best price, here provides some scenario for price down projection.

The underlined assumption is that there is a linear relationship between sales volume

increase and price change. Operating income decreases until price drops to $20.5.

From the spot chart, we could conclude that the optimized price should be in between

$20.5 and $21. That is, 20.5 < 𝑝𝑟𝑖𝑐𝑒 < $21

Price Volume Discount VC CM FC Operating Income

$24.5 750,000 22.23 10.48 13.76 1,232,117 -2,004,627

$22.5 10,00,000 22.25 10.48 11.78 1,232,117 -544,177

$21 1,187,500 20.77 10.48 10.29 1,232,117 -98,002

$20.5 1,250,000 20.28 10.48 9.79 1,232,117 -72,927

$20 1,312,500 19.78 10.48 9.3 1,232,117 -109,677

Q3. Why should Superior improve profitability during the period January 1 to June

30, 2005? How useful was the data for the purpose of this analysis?

From Exhibit 4, we can find out that the actual expenses were less than the

standard ones due to the application of new cost system. Reduction from expenses led

to the improved profitability. However, unit sales increased by 135,828 from 2004 to

2005, product 101 decreased by 69236, while the product 102 and 103 increased by

205,064. (Calculation is shown on below table). The marginal contribution increased

by 1,811,057 due to the sales growth. In conclusion, the profit increased resulted from

the sales growth instead of standard cost system. Comparison between actual cost and

standard cost could help company control cost and assess performance. Nonetheless,

there is no details provides in the exhibit 4 of the sales increase, the usage of exhibit is

therefore limited.

Product 101 Product102 Prodcut103 Total Remark

2004 January to June

Unit Sales

1066,095 514,827 493,487 2,074,409

Average half

of sales in

2004

2005 January to June

Unit Sales

996,859 712,102 501,276 2,210,237

Difference -69,236 197,275 7,789 135,828

CM