Steve Smith has completed a forecast of cost-volume-profit analysis for the Swis

Question

Steve Smith has completed a forecast of cost-volume-profit analysis for the Swiss Chocolate Manufacturing Company’s U.S. division manufacturing plant for the coming year. Smith notes the decline in volumes and prepares the breakeven analysis and computes the margin of safety; he notes that the current production volume projections indicate that the margin of safety will be positive for the period. However, the company will not achieve the sales volume required to achieve its desired level of operating and net income. In addition, the degree of operating leverage is high. Rick White has been tasked with suggesting some cost savings by the vice president of operations.

What types of costs might White suggest for potential savings based on your answer? Name three costs that could be addressed, and rationalize your response.

Explanation / Answer

Swiss Chocolate Manufacturing Company has high degree of operating leverage. In this case, cost savings can be attained by followings ways;

(1) In high degree of operating leverage, it is quite clear that this company has large amount of fixed costs in compare to variable costs. So company can reduce total cost by making reduction in fixed costs (for example: Terminate addition staff because sales is not enough thus lower sales can be handled by few number of employees, remove the cost of some idle space or machinery and replace employees by machines etc.)

(2) Company can also check its variables cost and can find where the costs are more than normal standards. In this case company can cut its abnormal variable cost that will result in lowering the total costs.

(3) In case of decline in sales’ volume company can make a research on its product line. Because in this case company can replace high cost products with low cost products finally it will result in a reduction of total costs. Company can also remove some products from its product line which have high costs or having lower sales.

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