Superior Manufacturing Company

Introduction

Superior Manufacturing Company is a company that had a loss of $688,000 in 2004. Manufacturing products 101, 102, and 103, cost analysis shows that products 102, and 103 have been unprofitable. SMC is also a company that has many competitors with products that are very similar so raising prices would cause customers to search for alternatives. The dominant competitor, Samra Company has been the cost regulator in the market by setting prices to be matched by competition. The manufacturing process uses three horizontally integrated dedicated factories that do not typically operate at capacity. Superior Manufacturing Company also uses a standard value costing method that is based on past performance.

Decision to keep Product 103

Continuing production vs. Stopping production assumptions

* Continue to pay fixed costs, not sell machinery immediately, and cut power to the building

* Immediately reduce all direct labour costs, and reduce indirect labour costs to 5% for administration involving the property

Table 1 (In thousands $)

| Continue Production | Stop Production |

Rent | $ 1,882 | $ 1,882 |

Property Taxes | $ 401 | $ 401 |

Property Insurance | $ 534 | $ 534 |

Compensation Insurance | $ 458 | $ 5.77 |

Direct Labour | $ 6,879 | |

Indirect Labour | $ 2,309 | $ 115.45 |

Power | $ 302 | |

Light and Heat | $ 106 | |

Building Service | $ 75 | |

Materials | $ 4,851 | |

Supplies | $ 350 | |

Repairs | $ 104 | |

Total | $ 18,249 | $ 2,938.22 |

Selling Expenses | $ 4,701 | |

General Administration | $ 1,783 | $ 89.15 |

Depreciation | $ 3,658 | $ 3,658 |

Interest | $ 539 | $ 539 |

Total Cost | $ 28,930 | $ 7,224.37 |

Less: Other Income | $ 51 | |

| $ 28,879 | |

Sales | $ 26,670 | |

Profit (Loss) | $ (2,209) | $ (7,224.37) |

As can be seen in Table 1, Superior Manufacturing Company should not drop product 103 because they would incur an operating loss of $5015.37 (thousand) according to the...