Superior Manufacturing

Superior Manufacturing’s President, Paul Harvey has inherited a business in a competitive market that he has little understanding of. Critical product and operational decisions need to be made to keep the business viable and give Harvey the management experience he needs for the future. Herbert Waters, an experienced manufacturing manager, has been hired to provide Paul Harvey the experience he needs and to help extract the critical management information needed from the cost management system.

In 2004 the year before hiring Herbert Waters, Superior Manufacturing showed a loss of $688,000. In 2005 a new standard cost system has been put into place based on costs and sales from 2004. In looking simply at total cost per unit versus the selling price of each item it seems that two of Superior’s three products are losing money on each unit they sell. Competitive factors in the product market are at work as well and Superior is looking at needing to match a price cut for their seemingly only remaining profitable product making this product unprofitable as well.

Waters as General Manager has been given full change authority by his inexperienced boss in exchange for explaining the decisions to Harvey so he can learn the business. Waters decides on no major changes until he can analyze the 2004 operations and wait for results from the first half of 2005 so he can get a clearer picture of Superior’s condition and formulate the correct changes. The operational information for 2004 is the basis used to create the standards of the new cost system so Waters shares the analysis of profit and loss and cost assignments with Harvey who immediately arrives at two conclusions. First he thinks Superior should immediately discontinue manufacturing product 103 because they lose $2.27 on every 100 lb unit they sell and there is no way to make up the cost difference. Second for product 102 the cost of $26.68 vs. a realized selling price of $25.25 per unit makes this product...