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Superior Manufacturing Company Case

In: Business and Management

Submitted By zhaoqian9065
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Description: The Superior Manufacturing Company received a net loss income statement for a good business year (2004). SMC has only 3 products and lots of competitors with similar products. So, price cutting always need a reduction by all the competitors in this industry. The manufacturing strategy of SMC is based on the ‘dedicated factory’, which means each product has its own productive factory. And SMC has a simple cost system. This cost system has 2 categories of costs. First one refers to the costs can be tied directly to the manufacture of specific products. Second one refers to the indirect costs and other costs.
Problem and issue: SMC uses a new standard cost system in 2005 which is used to value inventories, prepare budgets, and analyze performance. 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 SMC work effectively?
Firstly, we calculate the loss of drop of product 103. We use the data of 2004.

If we drop 103, the operating loss would be 4933.
Secondly, we calculate the reduction price of product 101.

If price of product 101 = 24.5
Profit = 750000*[24.5*(1-1.08%)-10.48]-12.36*996859 = -2004450
If price of product 101 = 22.5
Profit = 1000000*[22.5*(1-1.08%)-10.48]-12.36*996859 = -544000
We can see when the price goes down, the profit goes up.
Recommendation: SMC should keep 103, and reduce the price of 101. According to the price reducing problem of this industry, we can find it’s nearly a perfect competitive market. Also, we find that SMC has high fixed costs when comparing with variable costs. So, this cost system works efficiently to show cost characters and help make management…...

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