Superior Company Case

seQ1:

As a matter of fact, product 103 is not much profitable. In addition, Harley stated that the cost of good sold of product 103 could hardly be lowered more. Therefore, he suggested that product 103 should be dumped. However, Water decided to keep 103. We agree with Water’s decision according to the outcome of comparison of each decision’s net profit in Exhibit 1.

Exhibit 1

As it is shown in Exhibit 1, Superior is currently suffering $2,214,000 if continues producing product 103, and it will suffer operating more loss of $4,933,000 if it drops project 103. The difference between continuing and dropping comes from loss of sales income, all variable cost avoidance, and some fixed expense items are also reduced to 0. These fixed items that go down to 0 if product 103 is closed are indirect labor cost, selling expense and general administration. Indirect labor cost is based on labor hour, which does no longer exist if product 103 is dropped. Selling expense and general administration is calculated base on dollar amount of sales. Although other income is also based on sales value, it will not disappear even if product 103 is discontinued. On the contrary, selling expense and general administration can be partially saved by some actions such as dismissing selling staffs or reduce advertise expense. Therefore, Superior will suffer a loss over 7 million dollars if they decides not to keep product 103. Apparently, to avoid 4 million dollars more loss, they should keep Product 103.

Q3: What is Superior’s most profitable product?

Exhibit 3

They are also curious about which product is most profitable, so we calculated each product’s contribution margin per direct labor hour in Exhibit 3. The prices for each product are $24.5, $25.8, and $27.5. The variable cost of every single item is listed in Exhibit 4. After deducting variable cost, then divide contribution margin by direct labor hours take to make 1 unit, we found out that contribution margin per direct...