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11-3 The Superior Valve Division

In 2009, the Superior Valve Division of the Able Corporation found itself in a position typical of fast-growing companies. Although sales revenues were increasing rapidly, capital equipment allocations from Able were less than desired, and profits were variable. Jerry Conrad, the general manager of the division, enrolled that year in a seminar on contribution margin income sponsored by the American Management Association (AMA). According to Conrad, "Before I went to that seminar, my knowledge of contribution margin income was limited to casual comments that I overheard at group general managers' meetings. A large acquisition in the automotive aftermarket industry had always used a contribution margin approach in its accounting systems. All other segments of the Able Corporation used the full costing method, but this company was allowed to keep its contribution margin cost system because a forced change of systems at the time of acquisition would have been too disruptive."

Jerry believed that the full cost reports used in his division were accurate. He and Frances Kardell, the Division Controller, were confident they knew the total manufacturing cost of each of their products. However, Jerry did not have the same confidence in his staff's ability to determine how volume changes would affect profits. He was convinced that better utilization of plant and equipment and a more effective pricing structure would lead to substantially improved earnings. The division was not as profitable as others in the industry or other similar-size divisions in the corporation that had comparable manufacturing processes.






1.Assume that inventories will not change during the year. Prepare budgeted contribution approach product line income statements for the year ending 6/30/2009. Categorize fixed costs as either discretionary or committed.

2.Should Jerry Conrad decide to accept the Wadsworth Company special order? If so, what will be the new Hydro-Con return on sales?

3.Should the Superior Valve Division eliminate the Made to Order product line if there were no alternative uses for its production capacity?

4.If all resulting standard products could be sold, how should the MTO capacity be allocated? (Assume only the capacity currently being used to produce 20,000 MTO units would be used to produce additional standard products.)

5. Identify the strategic factors that Superior Valve should consider.

6. What changes, if any, should be made to the divisions cost system? Why?

7. What ethical issues, if any, should the division consider in connection with the

decision to eliminate MTO?

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