SUPERIOR MANUFACTURING CO.
Answering the questions at hand:
Based on the 2004 P & L, is Water’s decision to keep product 103 the right one?
Water’s decision is correct. If the company were to discontinue production of 103, they would
have an overall loss of $4,933,000. While they would no longer incur variable expenses, they
would have to pay fixed expenses regardless by reallocating them among 101 and 102. This
would decrease the profit margin of 101 and 102. Although 103 is presently operating at a
loss, the loss would be even greater if production ceased.
Calculations to adjust overall income if 103 were discontinued:
Sales $ ( 26,670)
Less variable exp. 12,944 (comp. ins., dir. Lab., materials., supplies, repairs, power)
Contr. Margin. $ ( 13,726)
Less fixed exp. 15,988 (rent, prop. Tax, prop. Ins., indirect labor, light/heat,
Bldg. services, selling exp., gen. admin. Depr., interest)
Less Fixed Exp. ( 7,195) Fixed exp. reallocated to 101 & 102
Net Oper. Loss $ ( 4,933)
Should Superior lower as of 1-1-06, its price of product 101? To what price?
If they were to lower the price to $22.50, they would have to increase unit sales to 1,050,000
rather than 1,000,000 to approximately breakeven. For every dollar, they decrease the price,
they would have to increase sales volume. It looks as if it would be more profitable for them
to lower the price providing they can meet the sales volume required to cover costs and still
make a profit.
Calculations based on Jan. – Jun. 2005:
sfc x unit sales = fc
12.36 x 996,859 =...