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BYP 9-2 Prasad & Green Inc. Plan for cost savings

BYP 9-2 Prasad & Green 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 magnetic disks. 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 manufacturers 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 Prasad & Green's accessory devices have declined somewhat. The company believes that the disk 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 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 10% to compensate for these reduced sales. Summary budget information is as follows.

Budgetary Planning
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


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?


Solution Preview

Direct material: Like the question pointed out, the reduction in direct material will mean (1) the use of materials with inferior quality which will affect the long-term quality of the product. (2) the design of the product has to be changed and unnecessary components have to be taken out.

Direct labor: (1) Strike (2) low morality which results in low quality of the products (3) good workers leave the company (4) theft and breakage increase

Insurance: company will not be covered ...

Solution Summary

314 words investigate the implications of reducing managerial or material costs by getting lower quality input, and makes recommendations on how to hit $70k savings.