Q1. Based on the 2004 statement of profit and loss data, do you agree with Water’s decision to keep product 103?
Yes, we agree with Water’s decision.We explain it through Incremental Analysis (differential Income Approach) Continue Drop Difference
Sales 26670 0 -26670
Less-Variable Expense
Compensation Insurance 458 0 458
Direct Labour 6879 0 6879
Materials 4851 0 4851
Supplies 350 0 350
Repairs 104 0 104
Power 302 0 302
Total Variable Expense 12944 12944
Contribution Margin 13726 -13726
Less-Fixed Expenses
Rent 1882 1882 0
Property Taxes 401 401 0
Property Insurance 534 534 0
Indirect Labour 2309 0 2309
Light & Heat 106 106 0
Building Services 75 75 0
Selling Exp 4701 0 4701
General
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Let us assume the linear relationship between price and quantity: Qty Sold = 750,000 + [{($.24.5- New Price)/($24.5 -$22.50)} X 250,000] = 750,000 + {($.24.5- New Price) X 125,000}
When price is $20.6, the quantity is 1,242,425 and profit is $101, we come near to break even point.
To sum up, if Superior reduces the price of product 101, its profit will increase significantly to breakeven.
Q.3 Why Superior Improved Profitability during the period January 1 to June 30, 2005? How useful was the data in Exhibit 4 for the purpose of this analysis?
From Exhibit 4, we can see that the actual expenses are less than the standard ones, so the reductions from those expenses lead to the improved profitability.
And the unit Sales of product 102 for period from January to June 2005 increased about 200,000 units compared to average of last year.
However, we still can not find the exact reasons for the reduction from Exhibit 4.
Q.4 Why is it Important that Superior has an effective cost system? What is your overall appraisal of the Company’s cost system and its use in reports to management? List the strength and weaknesses of this system and itsrelated reports for the purposes management uses the system’s output. What recommendations, if any would you make to Waters regarding the company’s cost accounting system and its related reports?
Ans:
In a market of competitiion, it is very critical to for Superior to have an
Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%
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