A case study on

11/19/2013

Submitted to:-Prof. S.Abhijith

Presented By: Group 7(Sec A) Madhusudan 13031 Masood Ahmed 13032 Mayank Vyas 13033 M. Sohail Wasim 13034 Mona Kabra 13035

INTRODUCTION OF THE CASE

This case talks about Sheridan Carpet Company that produces high grade carpeting material for use in automobiles and recreational vans. It was the industries practice to announce the prices of their products prior to the 6 month seasons. Sheridan was the largest company in its segment of the automobile carpet industry. Most of Sheridans competitors were smaller than Sheridan and they awaited Sheridans price announcement before setting their own selling prices. Sheridan produced a carpet named Carpet 104 which had especially dense nap & required special machine to produce. Sheridan had raised the price of this carpet from $3.90 to $5.20 per square yard from Jan. 2000 so as to increase the margin of carpet 104 up to that of other carpets in the line. Although Sheridan increased the price of the carpet 104 to $5.20 but the competitors kept the price at $3.90 only. This led to a loss of market share of Sheridan. Estimates of Marketing Manager, Mel Walters for 2001-1
SALES( in sq. yards)

IndustrySheridan-

6,30,000 1,50,000 (@$3.90) 65,000 (@$5.20)

There were also some concerns about the pricing which were discussed by the marketing manager and the chief accountant. The concerns were: 1) Whether the competitors would also reduce price if Sheridan reduces it. 2) Whether the decision related to pricing of carpet 104 affect the sales of the other carpets of the company.

But they concluded that the competitors could not reduce the prices further because they were in poor financial condition and the sale of other carpets will not be affected because 104 was a specialized item.

ANALYSIS OF ISSUES IN THE CASE

ISSUE- Sheridans salesperson are employed on salary basis. SOLUTION- The salesperson of Sheridan were employed on a salary basis so irrespective of the no. of units of carpet they sell their salaries were the same. Now that Sheridan wants to increase margin on carpet 104 they should employ the sales person on commission on per unit sales basis. In this way they will be able to reduce costs.

ISSUE- Additional costs due to special machine required to produce carpet 104. SOLUTION- The production of carpet 104 required special machinery and it was produced in a department whose equipment could not be used to produce other carpets. Thus, there was an additional cost which the company had to bear for the production of carpet 104.

ISSUE- Low margin on carpet 104 SOLUTION- The carpet 104 gave low margin to the company so to improve the margin they decided to increase the selling price of the carpet. Another step that can be taken to increase the margin is to reduce the overheads on the production of carpet 104. For eg. the selling expenses can be reduced by giving salesperson salaries based on no. of units they sell instead of a fixed monthly salary. Also the materials spoilage cost should be reduced by using more efficient methods of material handling and production.

ISSUE- Increase in price of carpet 104 SOLUTION- The Company increased the price of carpet 104 from $3.90 to $5.20. The main reason behind this was that the company needed large funds in the next few years for equipment replacement and plant expansion.

ISSUE- Non availability of adequate information. SOLUTION- The breakage of supervision cost in the indirect overhead is not given The breakage of selling & administration expense is not given. The administrative expense is applicable to all the variety of carpets produced and not only to carpet 104. So only a proportional amount of administrative expense should be allocated to carpet line 104.

ISSUE- Non-application of relevant costing method. SOLUTION- Relevant costing method includes relevant costs for taking any decision in organisation. Relevant cost is a cost that differs between alternatives in a decision. This term is synonymous with avoidable cost and differential cost. Isolating relevant cost is desirable for atleast two reasons:1. Only rarely will enough information be available to prepare a detailed income statement for both alternatives 2. Mingling irrelevant cost with relevant cost may cause confusion and distract attention from the information that is really critical. By using relevant costing method in the case we eliminated indirect departmental overhead that gave us a better picture to estimate the price of the carpet 104.

PROBLEM OF THE CASE

The major problem faced by the marketing manager and the chief accountant of Sheridan Carpet Company is that whether to keep the price of the Carpet 104 at $3.90 as per what the competitors have priced their product or to keep it as $5.20 so that they can increase their margin on Carpet 104.

SOLUTION
Sheridan is the largest company in its segment and they provide superior value than competitors products. According to us, the decision to raise the price from $3.90 to $5.20 is good. After raising the price though company has lost some market share but they have gained more margin which will help in equipment replacement and plant expansion. After expansion and equipment replacement, we recommend to decrease some margin to gain market share again.

ANNEXURE: The solution of the problem in excel sheet.

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