Superior Manufacturing Company

Case Study - 4. Superior Manufacturing Company
Description: The Superior Manufacturing Company received a net loss income statement for a good business year (2004). The Company has only 3 products and lots of competitors with similar products.
The manager thinks the product 103 should be dropped for its high cost which could not be cut down, and the product 102 has an increasing demand. Also, the managers want to make a price reduction. However, they find that the costs are too high to support the price reduction. Does the cost system of Superior Manufacturing Company work effectively?
QUESTION - 1. Based on the 2004 statement of profit and loss data (Exhibits 1 and 2), do you agree with Waters’s decision to keep product 103?
Firstly, we calculate the loss of drop of product 103. We use the data of 2004.

Total Costs on Product 103
If drop

Variable Costs
Fixed Costs
Product 103
Difference

Rent
F
1882
0
1882
1,882
0
Property Taxes
F
401
0
401
401
0
Property Insurance
F
534
0
534
534
0
Compensation Insurance
V
458
458
0

-458
Direct Labor
V
6879
6879
0

-6,879
Indirect Labor
F
2309
0
2309

-2,309
Power
V
302
302
0

-302
Light & Heat
F
106
0
106
106
0
Building Sevice
F
75
0
75
75
0
Materials
V
4851
4851
0

-4,851
Supplies
V
350
350
0

-350
Repairs
V
104
104
0

-104
Selling Expense
F
4701
0
4701

-4,701
General Administrative
F
1783
0
1783

-1,783
Depreciation
F
3658
0
3658
3,658
0
Interest
F
539
0
539
539
0

Total Expenses

28932
12944
15988
7195
-21737
Sales

26670

0
-26,670
Profit or Loss -2262

-7195
-4933

If we drop 103, the operating loss would be 4,933,000. It is obvious that at least in short and mid-term period stopping the production would bring much bigger losses than continuing it. Therefore we can’t recommend this as a good solution of the situation. Therefore, the company should keep Product 103.
Considering that the manufacturing facilities