Superior Manufacturing Company - a Need to Price the Company's Products in Line with the Dominant Market Player - Case Study Example

Running Head: Case Analysis- Superior Manufacturing Company Name: University: Course: Introduction Superior Manufacturing Company encountered a massive threat from falling prices. The falling prices had an adverse effect on the company?s most selling products. The market prices at the time had a negative impact as it led to lack of profitability, when it was assumed that the company would be making huge profits. This was not only true for the company?s, 103 products but it was also reflected on the other two products, namely 101 and 102. Even at the current market prices, the 2 products failed to show any signs of going up. The strategies employed by superior manufacturing company did not distinguish the indirect costs that were related to the three factories. The cost of manufacturing the products was attributed to hidden costs that were linked to the high cost of manufacturing each and every product i.e. 101,102 and 103. It was also evident that the market pricing was dictated by Samra, who were the leading and overriding manufacturers of the products. Manufacturers of the products had to follow the pricing system of Samra. This was done even at times when the price was detrimental to the other manufacturers. Background The year 2004, was unprofitable and this was followed by a more challenging year in 2005. Concerns both by shareholders had been raised that the trend would continue up to the next year, 2006. This was also coupled by the number and nature of competitors in the market. The competitors had the advantage of differentiation of products and this did no favor Superior Manufacturing Company. This meant that the company could not lower prices for fear that they would chase away existing and prospective customers. Numerous substitute products were available but their demand fluctuated depending on season and reason for purchasing according to the customers. This meant that even though Superior manufacturers maintained its prices, they were not immune to the threat of substitute products offered by its competitors. The manufacturing company maintained three factories that each made the three flagship products separately. After careful analysis it was observed that the three factories normally operated below capacity. This meant that the company?s manufacturing strategies did not match the market needs as they did not match the demand of the market meaning that the cost of production remained high. The cost system adapted by the company was not the best, for the challenging environment that they were encountering at the time. The cost system engaged a typical value that whose calculations were established from the company?s historic performance. This cost system however seemed to dispute the real sales and expense information that was known on the ground. It is in the year 2005 that a decision had to be made on whether to continue with the manufacture of the three products or the discontinuation of the product 103. The product was shown to be the most expensive to manufacture, yet it pulled in the least in terms of profits for the company. It was also a decision point as they also had to contemplate as to whether they should market their products using the price as dictated by Samra. Questions Question 1: Yes. This, I agree with Waters decision to keep product 103. This is based on the incremental analysis as below. 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 Administrative 1783 0 1783 Depreciation 3658 3658 0 Interest 539 539 539 Total Fixed Expenses 15988 7195 -4933 Net Operating Loss -2262 -7195 -4933 Hence the above analysis shows that Superior manufacturing company will suffer more losses, if it decides to stop the production of product 103. The company will suffer a net loss of 4.933 million Dollars. Q2. Superior should not lower its price on product 101. The company should maintain the price of the product to $24.50. Maintaining the price of the product would further increase the unit sales thus increasing the product profit margin. Q3. Superior improved profitability in the period from January 1st to June 2006 as the company adopted a different competitive strategy from the one they were using before. Through development of superior products, investment in new product lines, research and development, and shrewd management the company managed to market itself. This strategy is in line with the argument of Hunt & Killen who argue that ?survival of organizations competing in today?s rapidly changing environment? is dependent on a number of factors, the most pronounced being ?ability to continually make substantial changes in corporate structures, processes and strategic relationships? (Hunt & Killen, 2006). To counter the challenges, the company developed ambitious programs and expansion plan to see it spread to new areas, develop new products and reengineer the business processes. The company also improved on the market research as a result, it managed to tap the opportunities in the market by ensuring that its strategic position is enhanced by taking care of demands and customer preferences. With regard to the marketing strategies, it is important for the company to maintain its marketing strategies but improve on some. The company may need to increase market auditing as it is important for the company to prove the extensiveness of its market share. Profitability was also introduced after the Waters led the initiative of creating quality strategy which formed the basis of organizational success. Strategic creation and implementation shaped management and corporate successes with effectively formulated strategies. This led to the essence of organizational profitability. Although Waters agreed that the right strategy was not all that what was needed for success (implementation was also important), it was nonetheless imperative, and formed the foundation of effective management process. Strategy had to be well understood by every stakeholder in the company since in most cases; an organization operates and is aligned around its strategies. Q3b. The data in exhibit 4 is useful for analysis as we have used the data to identify the type and nature of expenses that affect superior manufacturing. The data also lists the cost of goods for the accounting period January 1st to June 2005 Q4. It is important for Superior to have an effective cost system as it will ensure that their products are assigned the right prices. The data dealt with in this case are cost data and the reports generated are cost related reports. The intention as suggested is to come up with reports that bring out the true or the actual cost of running a business (Nokes, 2000). Although some of the reports may be historical they are mostly maintained as confidential. It is therefore clear that the reports are mostly used within the business and that their main purpose is to assist in bringing down the costs of running the business. The production account items and the costs involved in running of the business are brought to focus. The managers will use such reports to try to reduce the prices of the various cost items that are consumed by the enterprise so as to increase the profits or if not, the managers may choose the strategy of accommodating high cost of production and concentrate on producing high quality products thereby getting a small profit margin but strive to gain dominance over competitors through producing the most superior products in the market Overview and Suggestion on the Case Analysis Superior manufacturing should have utilized their three factories, productively in order to ensure that the cost of production would go as down as possible. Customers of the products would then be attracted into buying from the company. According to the case, the company should also have invested in research and development of cost effective means of production. This would have a profound effect on the future of the company in terms of competitive strategy. Suggestion. As per analysis, the company should price their products in line with the dominant market player, i.e. Samra. This would ensure that customers do not discard from purchasing from the manufacturer. The company should also improve its cost system in order to provide controls and checks thus providing management with best alternative decisions to follow in their struggle to cut on costs and to improve on profits. The accounting system followed by the company would thus provide basis for determination of paths the enterprise is to take in its progress towards the future. Higher prices could push some customers not to purchase enterprise products but to seek alternatives from competitors. The cost accounting function should provide information and reports that should assist the management in making the right decisions while determining the right range of price to sell their products. Bills and costs Profits are arrived at by subtracting the costs and bills incurred from the revenues generated. The right decisions should therefore be made in the production process geared towards bringing down these costs. The management accountant?s evaluation, review reports on various costs incurred in production would provide projections, budget estimates and other forecasts that would assist the management make decision on the best alternative option to take that is more cost beneficial References Hunt, R. & Killen, C. 2006. Best Practice Portfolio Management. International Journal of Quality and Reliability Management. Read More