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Superior Manufacturing Company

Marshawn Pettes 12/18/2012 MBA 632

Problem Statement
Superior Manufacturing Company suffered a net loss of $688,000 during a good business year in 2004, due to the management problems faced by the president, Paul Harvey. Harvey is concerned that the company will continue to lose money if they keep product 103 and lower the price of product 101.

Analysis
Symptoms of Problems Faced by Paul Harvey Harvey made several poor decisions in 2004 due to his lack of leadership experience. Morale of the organization had suffered through lack of confidence in Paul Harvey. Harvey felt that it would be impossible to lower expenses on product 103 as much as $2.16 per 100 pounds. Herbert Waters, general manager, disagreed with Harveys decision to drop product 103 immediately. Reducing the sale prize of product 101 from $24.50 to $22.50 would be below cost. Root cause for the Problem Harvey only received four out of 10 years of training due to an unexpected death of his father, Richard Harvey.

Alternatives
Possible Solutions Trust Waterss Decisions Harvey did a great job at hiring Herbert Waters as general manager. Waters has the experience that Harvey lacks. Harvey should learn to trust Waters ideas because he hired Waters to execute any changes he desired that could help the company. Under their agreement, Waters would have to explain the reasons for his decisions to Harvey so that Harvey can eventually learn from Waters and become a successful leader upon Waterss retirement. Harvey needs to stop making quick decisions based off his own logic, after disagreeing with Waterss ideas. Analyze Product 103 Marshawn Pettes Superior Manufacturing Company 12/18/2012

Harvey viewed two reports and had one discussion about the products, then quickly decided to drop product 103 immediately. Superiors share of industry sales was 10% for product 103. Amongst the three products, 103 have the second highest percentage of industry sales. This shows that 103 have potential to get better. The company has suffered already and currently is in no position to make immediately changes without weighing its options first. Determine a Competitive Sales Price Samra Company announced a price reduction as of January 1, 2006 on product 101 from $24.50 to $22.50 per 100 pounds. Harvey has to determine a sales price that is both competitive to Samras price and that would not cause the company to suffer a huge lost. Harvey needs to focus on more factors outside of cost. He could focus on the possible quantity outcome of each amount to determine which price could yield the most sales the quickest.

Benefits Keep 103 Exhibit 4 shows product 3 doing better during the first six months of 2005. This should prove to Harvey that product 3 is capable of doing better. Although the company would still be at risk of losing money with product 103, you will read below that dropping product would create an even larger risk, in which will make keeping this product a benefit. The company would lose less money by keeping this product. Reduce 101 Price In 2006, there is a chance that materials and supplies would be about 5% below the 2005 standard. If this is the case, the variable cost for product 101 will decrease by 19 cents per unit. If Superior reduces the price of product 101 to $22.50, the sixmonth unit value is expected to be 1 million. Figure 2 shows product 101 breakeven volume to be 1,018,837.02. This will leave the company with 6 months to sale an additional 18,837.02 units to surpass their breakeven point in order to make a profit. Risks

Marshawn Pettes Superior Manufacturing Company 12/18/2012

Drop 103 Superior has high operating leverage for product 103 because fixed costs are high relative to the total cost of producing every unit of output. Superior will be responsible for paying their fixed cost regardless of what they do with their products. According to Exhibit 3, Superiors fixed costs consist of Rent, Property Insurance, Building Service, and Depreciation. However in the Breakeven Analysis, fixed costs are defined as costs that stay mostly the same, no matter how many units of a product or service are sold. This would make Property Taxes, Light & Heat, General Administrative, Selling Expense, Indirect Labor, and Other Income, fixed costs as well. Figure 5 illustrates the impact of dropping product 103. Superior would suffer a much greater lost on the income statement. Keep 101 Selling Price the Same If Superior keep the price at $24.50 as Harvey suggested, they are only expected to sale $750,000 during the first 6 months. The breakeven point at this price is $875,439.83. The company will be losing approximately $125,439.83 after 6 months in 2006.

Recommendations
Paul Harvey should question Waterss logic more. Harvey could gain the knowledge he desires by asking questions, like: What brought you to this decision? How does it work? Why do you believe this is the best option compared to others? Asking more questions could help Harvey build his own thinking process by analyzing a successful leader. He would have a better idea of what to look for in different situations and would be able to slow his decision making process down. This would help him to pay more attention to the smaller details that he may otherwise miss. Harvey should keep product 103 because dropping it has a much greater risk than keeping it. Figure 4 proves that product 103 contribution margin is 14.39 which is the highest of all the other products. This means product 103 contributes the most to paying for fixed costs. Although product 103 seems to be losing the most money in Exhibit 2, Harvey has to be mindful of the saying, Its Cheaper to Keep Her. Harvey needs to focus on modifying product 103 rather than dropping it. Harvey should reduce product 101 price to $22.50 on January 1, 2006. Figure 3 demonstrates the comparisons of selling at $24.50 vs. $22.50. Although both amounts appears to be loosing money at the six month mark, if the company continues to sell at $24.50 they suffer a much greater lost than selling at $22.50. Reducing the selling price to $22.50 in 2006 will actually save the company $106,602.81 in funds that would have been lost anyway. Marshawn Pettes Superior Manufacturing Company 12/18/2012

Figure 1 Superior Manufacturing Company Variable and Fixed Costs Per Unit
Product 101
2004-2005 2006 0.39 6.06 0.11 3.41 0.24 0.08 $10.29

Variable Cost
Compensation Insurance Direct Labor Power Materials Supplies Repairs Total Variable Cost 0.39 6.06 0.11 3.59 0.25 0.08 $10.48

Fixed Cost
Rent Property Tax Property Insurance Indirect Labor Light & Heat Building Service Selling Expense General Administrative Depreciation Interest Other Income Total Fixed Cost 0.88 0.29 0.25 2.07 0.07 0.05 4.27 1.62 2.65 0.25 0.04 $12.44 0.88 0.29 0.25 2.07 0.07 0.05 4.27 1.62 2.65 0.25 0.04 $12.44

Marshawn Pettes Superior Manufacturing Company 12/18/2012

Figure 2 Superior Manufacturing Company Breakeven Volume


Product 101

2004 & 2005 Price Per Unit Variable Cost Contribution Margin $24.50 10.48 14.02 Fixed Cost Contribution Margin Breakeven Volume 12.44 14.02 $887,303.85

2006 Price Per Unit Variable Cost $24.50 Fixed Cost Contribution Margin 10.29 14.21

Contribution Margin Breakeven Volume 12.44 14.21 $875,439.83

2006 Price Per Unit Variable Cost $22.50 Fixed Cost Contribution Margin 10.29 12.21

Contribution Margin Breakeven Volume 12.44 12.21 $1,018,837.02

Marshawn Pettes Superior Manufacturing Company 12/18/2012

Figure 3 Superior Manufacturing Company Compare Prices


January 1, 2006 - June 30, 2006
Selling Price of $24.50 Selling Price of $22.50
Expected Unit Sales Breakeven 750,000.00 $875,439.83 (125,439.83) 1,000,000.00 $1,018,837.02 (18,837.02)

Net Gain/Loss

Save

$106,602.81

Figure 4 Superior Manufacturing Company Comparing Contribution Margins


Product 101
Price Per Unit Variable Cost Contribution Margin $24.50 10.48 $14.02

Product 102
Price Per Unit Variable Cost Contribution Margin $25.80 11.77 $14.03

Product 103
Price Per Unit Variable Cost Contribution Margin $27.50 13.11

$14.39
Marshawn Pettes Superior Manufacturing Company 12/18/2012

Figure 5
Superior Manufacturing Company Income Statement Ending December 31, 2004
Drop Product 103

Gross Sales Cash Discount Net Sales Less Profit from Product 103 Cost of Manufacturing Add Variable Cost of Product 103 Manufacturing Profit Less: Selling Expense General Administration Depreciation Operating Profit Other Income Net Profit before Interest Less: Interest

105905 1567 104338 (26,670) 65251 12944 25361 18383 6534 13591

38508 (13,147) 205 (12,942) 1472 $(14,414.00)

Net Loss

Marshawn Pettes Superior Manufacturing Company 12/18/2012