Superior Manufacturing. HBR Case
Model Solution
1 Profit and Loss—2004
Products 101, Less
Products 102, Products 101 Products 102,
Products 103 Products 103
Contribution $57,342 13,842 $ 43,500
Fixed costs 58,235 58,235
Other Income 205 205
Net Loss $688 $ 14,530
Waters’s decision to retain product 103 was correct. As indicated below, if product 103 had
been dropped at the beginning of 2004 the company’s loss would have been considerably
greater. The exact amount is the lost product 103 contribution.
2. The product 101 per unit variable-costs analysis for Question 2 is shown below. The only
change from the 2005 per unit standard variable costs is the 5% reduction in the price of
Product 101
Per Unit
2005 standard variable costs $10.39
Less: 2006 price reductions
Materials ($3.59 x .05) 0.18
Supplies ($.25 x .05) 0.01
2005 product 101 variable costs/unit $10.20
The total contribution analysis for each price per unit and the related volume is shown below.
Volume (units)
1,000,000 750,000
Sales $22,500,000 $18,375,500
Cash discount (1.086%) 243,000 198,455
Net sales 22,257,000 18,177,045
Variable costs 10,200,000 7,650,000
Total contribution $12,057000 $10,527,045
Based on a straight contribution consideration, lowering the price from $24.50 to $22.50 per unit
is the correct decision. At the lower price the total contribution is greater. Beyond the
contribution discussion, consider some strategic marketing considerations related to lowering
3. The principal reasons Superior’s profitability improved during the first half of 2005 are:
1. Substantially more product 102 was sold. The increased sales contributed $2.7 million extra
contribution. This increase more than offset the lower product 101 contribution.
2. Actual variable costs were very close to standard (2004 actual costs).
Despite a substantially higher physical volume, actual fixed costs were only 2.5% greater than the
prior year’s actual fixed costs expressed on a half-year basis.
4. An effective cost accounting system is critical to Superior’s success. The company has little
control over sales prices and industry demand. This leaves cost management, product quality,
and customer service as the principal areas for management attention. The cost accounting
system provides the key financial management data for decisions in these three areas.
Dr Niran Subramaniam FCMA
, Superior Manufacturing. HBR Case
Model Solution
Dr Niran Subramaniam FCMA
Model Solution
1 Profit and Loss—2004
Products 101, Less
Products 102, Products 101 Products 102,
Products 103 Products 103
Contribution $57,342 13,842 $ 43,500
Fixed costs 58,235 58,235
Other Income 205 205
Net Loss $688 $ 14,530
Waters’s decision to retain product 103 was correct. As indicated below, if product 103 had
been dropped at the beginning of 2004 the company’s loss would have been considerably
greater. The exact amount is the lost product 103 contribution.
2. The product 101 per unit variable-costs analysis for Question 2 is shown below. The only
change from the 2005 per unit standard variable costs is the 5% reduction in the price of
Product 101
Per Unit
2005 standard variable costs $10.39
Less: 2006 price reductions
Materials ($3.59 x .05) 0.18
Supplies ($.25 x .05) 0.01
2005 product 101 variable costs/unit $10.20
The total contribution analysis for each price per unit and the related volume is shown below.
Volume (units)
1,000,000 750,000
Sales $22,500,000 $18,375,500
Cash discount (1.086%) 243,000 198,455
Net sales 22,257,000 18,177,045
Variable costs 10,200,000 7,650,000
Total contribution $12,057000 $10,527,045
Based on a straight contribution consideration, lowering the price from $24.50 to $22.50 per unit
is the correct decision. At the lower price the total contribution is greater. Beyond the
contribution discussion, consider some strategic marketing considerations related to lowering
3. The principal reasons Superior’s profitability improved during the first half of 2005 are:
1. Substantially more product 102 was sold. The increased sales contributed $2.7 million extra
contribution. This increase more than offset the lower product 101 contribution.
2. Actual variable costs were very close to standard (2004 actual costs).
Despite a substantially higher physical volume, actual fixed costs were only 2.5% greater than the
prior year’s actual fixed costs expressed on a half-year basis.
4. An effective cost accounting system is critical to Superior’s success. The company has little
control over sales prices and industry demand. This leaves cost management, product quality,
and customer service as the principal areas for management attention. The cost accounting
system provides the key financial management data for decisions in these three areas.
Dr Niran Subramaniam FCMA
, Superior Manufacturing. HBR Case
Model Solution
Dr Niran Subramaniam FCMA
