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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.

See Also This Related BrainMass Solution

Segmented Reporting and Decision Making

The most recent monthly contribution format income statement for Raven Company is given below:

Raven Company
Income Statement
For the Month Ended May 31
Sales $900,000 100.0%
Variable expenses 408,000 45.3
Contribution 492,000 54.7
Fixed expenses 465,000 51.7
Net operating income $ 27,000 3.0%

Management is disappointed with the company's performance and is wondering what can be done to improve profits. By examining sales and cost records the following is determined:

a. The company is divided into two sales territories-Central and Eastern. The Central Territory recorded $400,000 in sales and $208,000 in variable expenses during May. The remaining sales and variable expenses were recorded in the Eastern Territories. Fixed expenses of $160,000 and $130,000 are traceable to the Central and Eastern Territories, respectively. The rest of the fixed expenses are common to the two territories.

b. The company is the exclusive distributor for two products- Haws and Paws. Sales of Haws and Paws totaled to $100,000 and $300,000, respectively, in the Central Territory during May. Variable expenses are 25% of the selling price for Haws and 61% for Paws. Cost records show that $60,000 of the Central Territory's fixed expense is traceable to Haws and $54,000 to Paws, with the remainder common to the two products.

1. Prepare contribution format segmented income statements, the first showing the total company broken down between sales territories and then showing the Central Territory broken down by product line. Show both Amount and Percent columns for the company in total and for each segment. Round percentage computations to one decimal place.

2. After reviewing the Central Territory segmented by sales territory, and find what points revealed by this statement should be brought to management attention.

3. After viewing the Central Territory segmented by product line, what points should be brought to management attention?

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