Question

Elliot & Hesse Inc. Manufactures ergonomic devices for computer users. Some of its more popular products include glare screens (for computer monitor), keyboard stands with wrist rests, and carousels that allow easy access to discs. Over the past 5 years, it experienced rapid growth, with sales of products increasing 20% to 50% each year.

Last year, some of the primary manufacturers of computers began introducing new products with some of the ergonomic designs, such as glare screens and wrist rest, already built in. As a result, sales of Elliot & Hesse’s accessory devices have declined somewhat. The company believes that the disc carousels will probably continue to decline. When the next year’s budget was prepared, increases were built into research and development so that replacement products could be developed, or the company could expand into some other product line. Some Product lines being considered are general-purpose ergonomic devises including back supports, footrest, and sloped writing pads.

The most recent results have shown that sales decreased more than was expected for the glare screens. As a result, the company may have a shortage of funds. Top management has therefore asked that all expenses be reduced by 10% to compensate for these reduces in sales. Summary Budget information is as follows.

Direct Material                                    $240,000

Direct Labor                                           110,000

Insurance                                                50,000

Depreciation                                         90,000

Machine Repairs                                   30,000

Sales Salaries                                        50,000

Office Salaries                                       80,000

Factory Salaries (indirect labor)              50,000

Total                                                    $700,000

Instructions

Using the information above, answer the following questions.

1. What are the implications of reducing each of the cost? For example, if the company reduces direct materials cost, it may have to do so by purchase lower-quality materials. This may affect sales in the long run.
2. Based on your analysis in (a), what do you think is the best way to obtain the $70,000 in cost savings request? Be specific. Are there any costs that cannot or should be reduced? Why?

Answer 1

Answer :

(A) Implications of reducing each of the following costs :

Direct materials :  If the company reduces direct materials cost, it may have to do so by purchase lower-quality materials. This may affect sales in the long run.

Direct Labor :   If the company reduces direct Labor cost, it would obtained by either lower labor rate or decrease in number of workers. This would result in Lower productivity of the workers and the lower quality of the product as well.

Insurance : If company reduces the Insurance cost it would results in Under insurance and expose the organization to huge Uncertainties and risks.

Machine Repairs : Reduction in Machine Repairs cost would results in more Machine breakdown and that will put more production halts. this would Impact Overall productivity.

Sales Salaries : The company should reduce the fixed portion of Sales salaries and try to give sale salaries in relation to Sales. This would reduce overall sales salaries and also results in increase in  sales.

Office Salaries : Company can reduce Office salaries cost because company is  going through a tough phase. A little reduction in office salaries can be easily managed.

Factory Salaries(Indirect Labor) : Company can reduce Indirect Labor to a limited extent as it doesn't affect much.

(B)

Following costs should be reduced to obtain the $70,000 in cost savings :

Sales Salaries = 15,000

Office Salaries = 35,000

Factory Salaries (indirect labor) = 20,000

We should not reduce cost of Direct Material, Direct Labor, Insurance, Machine Repairs. The reason for not reducing has been already discussed in Part A.