Q1. 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?
Table 1: Product 103 Costs
|Product 103 Costs | | |direct |indirect | |Fixed | |16,039 | |Variable |5,763 |7,181 |
If product 103 is terminated, there will be a greater loss since Superior has to continue to pay fixed costs. Fixed costs include Rent, Property Tax, Property Insurance, Indirect Labor, Light & Heat, Building Service, Selling Expense, SGA, Depreciation, Interest and Other Income. Loss of 16,039,000yen (see Table 1) without Product 103 is more than the existing loss of 2,209,000yen with Product 103. Hence, Superior Manufacturing should continue to manufacture Product 103 to generate income in order to narrow its losses.
Q2. Should Superior lower as January 1, 2006 its price of product 101? To what price？
The objective of this question is to explore if there is a suitable price that generates a positive net profit to the company. In order to find a net profit, the figures of Sales, Variable Costs, and Fixed Costs are required for a calculation. We can find those figures by using the following formulas. Table 2 below can be used as a reference.
Profit=[Quantity x (Sales price x (1 – Cash discount) – VC )] – FC
Total Fixed Cost=Standard cost per 100 lbs x Unit Sales
=12.36 x 996,859
1st Case, product 101 is sold at 24.50 yen.
Profit=[750,000 x (24.5 x (1 – 1.08%) – 10.29)] – 12,321,177
2nd Case, product 101 is sold at 22.50 yen.
Profit=[1,000,000 x (22.5 x (1 – 1.08%) – 10.29)] – 12,321,177
Table 2: Fixed Cost vs Variable Cost
|Fixed Cost |Variable Cost | |Cost |$ per unit |Cost |$ per unit | |Rent |0.88 |Compensation Insurance |0.39 | |Property Taxes |0.29 |Direct Labor |6.06 | |Property Insurance |0.25 |Power |0.11 | |Indirect Labor |2.07 |Materials |3.41 | |Light & Heat |0.07 |Supplies |0.24 | |Building Service |0.05 |Repairs |0.08 | |Selling Expense |4.27 | | | |General Administrative Depreciation |1.62 | | | |Interest |2.65 | | | |Less: Other Income |730 | | | | |110 | | |
As we can see, when the price is reduced from 24.50 yen to 22.50 yen, the loss is also decreased. Therefore, the price at 22.50 yen will be more beneficial to a company than that of 24.50 yen. In order to make a thorough analysis, we need to compute whether there is any figure that will turn the net profit into positive value.
When a price decreases by $2.00, sales quantity increases by 250,000 units. Keeping this linear relationship, we use the price elasticity of demand to calculate the relationship between price and sales...