Superior Manufacturing Company

Q1. Based on the 2004 statement of profit and loss data, do you agree with Water’s decision to keep product 103?

Yes, we agree with Water’s decision.We explain it through Incremental Analysis (differential Income Approach)

Continue Drop Difference

Sales 26670 0 -26670

Less-Variable Expense

Compensation Insurance 458 0 458

Direct Labour 6879 0 6879

Materials 4851 0 4851

Supplies 350 0 350

Repairs 104 0 104

Power 302 0 302

Total Variable Expense 12944 12944

Contribution Margin 13726 -13726

Less-Fixed Expenses

Rent 1882 1882 0

Property Taxes 401 401 0

Property Insurance 534 534 0

Indirect Labour 2309 0 2309

Light & Heat 106 106 0

Building Services 75 75 0

Selling Exp 4701 0 4701

General Administrative 1783 0 1783

Depreciation 3658 3658 0

Interest 539 539 539

Total Fixed Expenses 15988 7195 -4933

Net Operating Loss -2262 -7195 -4933

According to above, Superior will suffer operating more loss of $4,933,000 if it drop project 103.Therefore, the company should keep Product 103.

Q.2 Should Superior lowers as January 1, 2005 its price of product 101? To what priceпјџ

Variable Cost (VC) Fixed Cost (FC)

Compensation Insurance 0.39 Rent 0.88

Direct Labour 6.06 Property Taxes 0.29

Materials 3.59 Property Insurance 0.25

Supplies 0.25 Indirect Labour 2.07

Power 0.11 Light & Heat 0.07

Repairs 0.08 Building Services 0.05

Total Variable Cost 10.48 Selling Exp 4.27

General Administrative 1.62

Depreciation 2.65

Interest 0.25

Less: Other Income -0.04

Total Fixed Cost 12.36

As we know,

Profit= Qty {Sales Price (1-cash Discount%)-VC} - FC

FC for six months = FC per unit X Unit sales from Jan to Jun 2005

=12.36 X 996,859= 12,321,000

a) Keep the price same as $24.50 for product 101

Profit = 750,000 x {24.5 x (1-1.08%)-10.48} - 12,321,000

= -$ 2,004,450

b) Change the price for product 101 to $ 22.50

Profit = 1,000,000 x {22.5 x (1-1.08%)-10.48}- 12,321,000