Prasad and Green Inc have been instructed that they must decrease their total expenditure by 10% because sales of their products have been declining. This essay looks at each of their costs and what the implications of reducing them would be, and makes recommendations based on this.
Budgetary Planning / Case Study
Prasad and Green Inc, have been instructed by their managers to reduce expenses by 10% due to reduced sales. What would be the implications of reducing each of the costs?
(a) Implications of reducing costs
Let’s take a look at each of the costs incurred by the company as laid out by the budget provided to us.
The cost of direct materials is $240,000, and this would include all the manufacturing materials, etc.. A possible implication of reducing this cost would be a decline in quality of the completed product. However, it may be possible to source generic producers of the material who provide the same quality at a lower price. Also, since new products are to be developed, new suppliers can be brought on board at a cheaper rate, and perhaps some of the older ones can be phased out. I believe that subsequent to doing costing and checking quality the
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Wages and salaries
The budget has broken wages and salaries down into Sales salaries ($50,000), office salaries ($80 000), factory salaries (indirect labor) ($50,000) and direct labor, ($110,000). Each of these divisions can be looked at separately or as a whole. The implications of reducing this cost would be either a reduction in staff or salary cuts. But various options could be looked into – outsourcing, retrenchments, etc. . I believe at least 20% of the office salaries and 10% of costs incurred on direct labor can be saved here.
Insurance is currently costing the company $50 000. Depending on what the excess amount is, the premiums could be reduced on this. 10% of the $50 000 can be saved here.
Machine repairs incurred by the company on an annual basis total $30,000. Perhaps the machines could be serviced via another company. Some pricing needs to be done in this case, and I believe this could be brought down to $20,000.
(b) The best way to obtain the $70,000 in cost savings requested
In findings and discussion in (a) I have stated that 15% of the $240,000 being spent on direct materials can be saved – totaling an amount of $30,000. In addition, I have said that 20% of office salaries ($16,000) and 10% of costs incurred on direct labor ($11,000) can be saved, totaling $25,000. However, since one of the company’s main objectives for the future is the development of new products, I don’t believe that the sales side, or the indirect labor side should be reduced. If you looked at direct labor though and considered converting that to indirect labor on a contractual basis, costs could be saved here.
Finally I looked at insurance and machine repairs and motivated why each of these expenses could be dropped by 10% (a total of $15,000).
Added together, these total an amount of $72,000 which can be saved in expenses. This is how I believe Prasad and Green Inc can best meet the requirement put onto them of a reduction in expenses of $70.000.