Essay About Sales Price And Variable Cost

Superior Manufacturing Company Case
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Managerial Accounting
Superior Manufacturing Company
Q1: Base on the 2004 statement of profit and loss data, do you agree with Water’s
decision to keep product 103?
According to the concept of managerial concept, production distribution should
follow the concept of margin profit, which is contribution margin that deducts
variable cost from sales price. Since product 101, 102 and 103 shared total fixed cost
of the factory, the variable cost of each is much more important when deciding the
production volume. Maximizing the volume of most profitable product will help the
company not only to cover fixed cost but also to increase operating income. Thus the
decision should base on the variable costing instead of absorbing costing shown as
exhibit 2.
By dividing cost from exhibit 2 into variable cost and fixed cost according to the
definition given in exhibit 3, we could calculate the contribution margin by unit of
each product, which are $13.76, $13.46 and $13.92 respectively. The result indicates
that product 103 possess the highest profitability by unit. Thus, Superior Company
should keep produce product 103 in order to maximize operation income.
Product 101 Product 102 Product 103
Sales (Net) 24.24 25.23 27.03
Compensation Insurance 0.39 0.42 0.46
Direct Labor 6.06 5.92 6.97
Power 0.11 0.24 0.31
Materials 3.59 4.58 4.91
Supplies 0.25 0.46 0.36
Repairs 0.08 0.15 0.10
Total variable cost (10) (12) (13)
Contribution Margin 13.76 13.46 13.92
Q2: Should Superior lower as of January 1, 2006 its price of product 101? To what
price?
In order to decide whether to lower the price, we should calculate the profit
structure by different price and volume. Fixed cost remains the same as $1,232,117,
which is the sales volume (996,859) multiples fixed cost of product 101 ($12.36).
Price Volume Discount VC CM FC Operating Income
No Price Down $24.5 750,000 22.23 10.5 13.76 1,232,117 -2,004,627
Price Down $22.5 10,00,000 22.25 10.5 11.78 1,232,117 -544,177
From the above chart, we could find that the operating income increases while
price going down. Although operating profit remains negative, the volume increased
by price down could still compensate the loss from production. Therefore, Superior
Company should lower the price.
To find the best price, here provides some scenario for price down projection.
The underlined assumption is that there is a linear relationship between sales volume
increase and price change. Operating income decreases until price drops to $20.5.
From the spot chart, we could conclude that the optimized price should be in between
$20.5 and $21. That is, 20.5 < 𝑝𝑟𝑖𝑐𝑒 < $21 Price Volume Discount VC CM FC Operating Income $24.5 750,000 22.23 10.48 13.76 1,232,117 -2,004,627 $22.5 10,00,000 22.25 10.48 11.78 1,232,117 -544,177 $21 1,187,500 20.77 10.48 10.29 1,232,117 -98,002 $20.5 1,250,000 20.28 10.48 9.79 1,232,117 -72,927 $20 1,312,500 19.78 10.48 9.3 1,232,117 -109,677 Q3. Why should Superior improve profitability during the period January 1 to June 30, 2005? How useful was the data for the purpose of this analysis? From Exhibit 4, we can find out that the actual expenses were less than the standard ones due to the application of new cost system. Reduction from expenses led to the improved profitability. However, unit sales increased by 135,828 from 2004 to 2005, product 101 decreased by 69236, while the product 102 and 103 increased by 205,064. (Calculation is shown on below table). The marginal contribution increased by 1,811,057 due to the sales growth. In conclusion, the profit increased resulted from the sales growth instead of standard cost system. Comparison between actual cost and standard cost could help company control cost and assess performance. Nonetheless, there is no details provides in the exhibit 4 of the sales increase, the usage of exhibit is therefore limited. Product 101 Product102 Prodcut103 Total Remark 2004 January to June Unit Sales 1066,095 514,827 493,487 2,074,409 Average half of sales in 2005 January to June Unit Sales 996,859 712,102 501,276 2,210,237 Difference -69,236 197,275 7,789 135,828