Superior Manufactoring

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Superior Anufacturing
Question 1 Answer
Based off of the 2004 statement of profit and loss data, I do agree with Water’s decision in keeping product 103. The total sunk costs for the company could be more substantial in a shorter time than having years of low profits from the sales of product 103. Overall the company would lose $4,933,000 by eliminating product 103. Recovering the indirect costs of dropping the product line would also be unclear as well. An incremental analysis would be the best approach in determining whether keeping product 103 is beneficial or not.
Continue Drop Difference ***(Thousands $)***
Sales $ 26,670 0 -26,670
Less-Variable Expense
Compensation Insurance 458 0 458
Direct Labor 6,879 0 6,879
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The cost system in place at Superior Manufacturing did not allow them to see enough of the indirect costs associated with each product. The inability to determine actual costs incurred by each product line inhibits Superior Manufacturing from reporting accurate information. A main example of this is displayed with the indirect expenses associated with each product building. The reports that the management used in the cost system referenced their standard costs, which were based on the previous year prices. If any of the direct costs were actually lower than the standards listed it resulted in higher revenues. A few suggestions that I would recommend to Waters regarding the cost accounting system and reports would to also look at more of the actual sales and expenses in reports. The cost system that is being utilized focuses mainly on past results.
In addition to the reporting suggestions, I would also suggest to Superior Manufacturing to look at the amount of resources used indirectly. If the company can reduce the amount of wasted warehouse space and continue to produce all three products, then they would be able to reduce more indirect expenses and increase their profitability. Another area of concern would be that they are basing their prices to coincide with Samra. There are also many other competitors making similar products as Superior Manufacturing. The
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