Superior Manufacturing Company

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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)

Sales 266700-26670
Less-Variable Expense
Compensation Insurance4580458
Direct Labour687906879
Total Variable Expense1294412944
Contribution Margin13726-13726
Less-Fixed Expenses
Property Taxes4014010
Property Insurance5345340
Indirect Labour230902309
Light & Heat1061060
Building Services75750
Selling Exp470104701
General Administrative178301783
Total Fixed Expenses159887195-4933
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 price? Variable Cost (VC)Fixed Cost (FC)
Compensation Insurance0.39Rent0.88
Direct Labour6.06Property Taxes0.29
Materials3.59Property Insurance0.25
Supplies0.25Indirect Labour2.07
Power0.11Light & Heat0.07
Repairs0.08Building Services0.05
Total Variable Cost10.48Selling Exp4.27
General Administrative1.62
Less: Other Income-0.04
Total Fixed Cost12.36

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...
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