Bedner & Flott Inc. manufactures ergonomic devices for computer users. Some of t

Question

Bedner & Flott Inc. manufactures ergonomic devices for computer users. Some of their more popular products include glare screens (for computer monitors), keyboard stands with wrist rests, and carousels that allow easy access to discs. Over the past 5 years, they experienced rapid growth, with sales of all products increasing 20% to 50% each year.
Last year, some of the primary manufactures of computers began introducing new products with some of the ergonomic designs, such as glare screens and wrist rests, already built in. As a result, sales of Bedner & Flott's accessory devices have declined somewhat. The company believes that the disc carousels will probably continue to show growth, but that the other products will probably continue to decline. When the next year's budget was prepared, increases were built in to 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 devices including back supports, foot rests, and slopped 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 10% to compensate for these reduced sales. Summary budget information is as follows.
Direct materials $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.
(a) What are the implications of reducing each of the costs? For example, if the company reduces direct materials costs, it may have to do so by purchasing lower-quality materials. This may affect sales in the long run.
(b) Based on your analysis in (a), what do you think is the best way to obtain the $70,000 in cost savings requested? Be specific. Are there any costs that cannot or should not be reduced? Why?

Explanation / Answer

a To reduce each element of cost could lead to disasterous results. Example : reducing material cost might lead to a decline in the quality of the final product. Similarly reducing labor cost wouldn't go very well with the direct labourers which would again lead to a decline in the quality of the final product. Depreciation and repairs cannot be reduced unless the useful life of the machinery is appraised . b. The cost reduction can be achieved by a combination of the below : Improving methods of production by more sophisticated equipment .This would reduce direct labor cost .In fact fully automated methods of production might be considered. The machinery repairs are almost 1/3 of the depreciation expense. This shows that there might be too many break downs in the production process. Hence , replacement of the machinery might be considered so that there would be a flat reduction in the toal cost by $30,000. Some portion of the sales salaries might be made variable so that the sales people might be motivate dto sell more.

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