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    Analyzing costs reductions at Dell

    On May 31, 2007, Dell Inc. announced it was making several changes to the way it did business in order ". . . to restore competitiveness to the core business, re-ignite growth, and build solutions critical to customer needs." As one of the changes the company: Initiated a comprehensive review of costs across all processes and organizations from product development and procurement through service and support delivery with the goal to simplify structure, eliminate redundancies and better align operating expenses with the current business environment and strategic growth opportunities. As a part of this overall effort, Dell will reduce headcount by approximately 10 percent over the next 12 months. The reductions will vary across geographic regions, customer segments, and functions, and will reflect business considerations as well as local legal requirements.

    Question 1.
    In narrative format, answer all questions presented in the case. In your discussion mention some ways other than cost cutting that will improve company operations.
    a. Other than the obvious reduction in salary and wages expenses, identify some costs savings
    Dell might realize by reducing its workforce by 10 percent.

    b. Assume some of the workers being terminated are assembly employees and that they are
    being replaced by new robotic assembly machines. Explain how this might affect Dell's
    unit-level, batch-level, and/or facility-level costs.

    c. Consider the additional information presented below, which is hypothetical. All dollar
    amounts are in thousands, unit amounts are not. Assume that Dell decides to eliminate
    one product line, Delta, for one of its segments that currently produces three products. As
    a result, the following are expected to occur:

    (1) The number of units sold for the segment is expected to drop by only 40,000 because of
    the elimination of Delta, since most customers are expected to purchase an Alpha or Beta
    product instead. The shift of sales from Delta to Alpha and Beta is expected to be evenly
    split. In other words, the sales of Alpha and Beta will each increase by 80,000 units.

    (2) Rent is paid for the entire production facility, and the space used by Delta cannot be

    (3) Utilities costs are expected to be reduced by $18,000.

    (4) The supervisors for Delta will all be terminated. No new supervisors will be hired for
    Alpha or Beta.

    (5) The equipment being used to produce Delta is also used to produce the other two
    products. The company believes that as a result of eliminating Delta it can eliminate
    some equipment that has a remaining useful life of 5 years, and a projected salvage
    value of $20,000. Its current market value is $30,000.

    (6) Facility-level costs will continue to be allocated between the product lines based on
    the number of units produced.

    Product Line Earnings Statements
    (Dollar amounts are in thousands)

    Annual Costs of Operating
    Each Product Line Alpha Beta Delta Total

    Sales in units 400,000 400,000 200,000 1,000,000
    Sales in dollars $ 400,000 $ 400,000 $ 200,000 $1,000,000

    Unit-level costs:
    Cost of production 40,000 40,000 22,000 102,000
    Sales commissions 5,000 5,000 2,000 12,000
    Shipping and handling 9,000 8,000 4,000 21,000
    Miscellaneous 3,000 2,000 2,000 7,000
    Total unit-level costs 57,000 55,000 30,000 142,000

    Product-level costs:
    Supervisors salaries 4,000 3,000 1,000 8,000

    Facility-level costs:
    Rent 40,000 40,000 20,000 100,000
    Utilities 50,000 50,000 25,000 125,000
    Depreciation on equipment 160,000 160,000 80,000 400,000
    Allocated company-wide expenses 10,000 10,000 5,000 25,000
    Total facility-level costs 260,000 260,000 130,000 650,000
    Total product cost 321,000 318,000 161,000 800,000
    Profit on products $ 79,000 $ 82,000 $ 39,000 $ 200,000

    Question 2.

    Which costs and expenses are avoidable in the Dell case?

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    Solution Summary

    Your response is in word (discussion) and revised costs in Excel.