The difference between cost-reduction and cost-avoidance. Explain the reason why cost avoidance is described as “soft”, “funny money” and “easy to manipulate”? Mention the situation when purchasing can be regarded for cost reduction or cost avoidance? Introduction: Performance improvement along with cost reduction is one of the major areas companies are giving high focus as it enables them to gain competitive advantage. But unfortunately only handful of companies have found a limited success in achieving the goal.

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Ness Engineering is a private limited company mainly engaged in the continuous production and assembly of domestic products. The annual turnover is $900,000,000. The largest area of expenditure is raw materials and components where the annual spend is approximately $450,000,000. The Managing Director, Bill, considers that profit margins are too small and has asked you to suggest how profitability might be increased. Bill suggests that this might be done by appointing additional sales staff and by an advertising campaign, which would, hopefully, increase turnover and thereby reduce overhead cost per item. You find that purchasing is little more than a post-office function. Specifications are received from the design or user departments and sent either to supplies designated by the directors or to the supplier providing the cheapest quotation. The company does, in fact, deal with many suppliers and issues many orders for low-cost items. All purchasing is done by manual means. None of the…

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Chapter 19, Problem 9DQ

Summary Introduction

To determine: The difference between cost-reduction and cost-avoidance. Explain the reason why cost avoidance is described as “soft”, “funny money” and “easy to manipulate”? Mention the situation when purchasing can be regarded for cost reduction or cost avoidance?

Introduction: Performance improvement along with cost reduction is one of the major areas companies are giving high focus as it enables them to gain competitive advantage. But unfortunately only handful of companies have found a limited success in achieving the goal.

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Ness Engineering is a private limited company mainly engaged in the continuous production and assembly of domestic products. The annual turnover is $900,000,000. The largest area of expenditure is raw materials and components where the annual spend is approximately $450,000,000. The Managing Director, Bill, considers that profit margins are too small and has asked you to suggest how profitability might be increased. Bill suggests that this might be done by appointing additional sales staff and by an advertising campaign, which would, hopefully, increase turnover and thereby reduce overhead cost per item. You find that purchasing is little more than a post-office function. Specifications are received from the design or user departments and sent either to supplies designated by the directors or to the supplier providing the cheapest quotation. The company does, in fact, deal with many suppliers and issues many orders for low-cost items. All purchasing is done by manual means. None of the…

The oasis outpost of Abu Ilan, in the heart of the Negev desert, has a population of 20 Bedouin tribesmen and 20 Farima tribesmen. El Kamin, a nearby oasis, has a population of 32 Bedouins and 8 Farima. A lost Israeli soldier, accidentally separated from his army unit, is wandering through the desert and arrives at the edge of one of the oases. The soldier has no idea which oasis he has found, but the first person he spots at a distance is a Bedouin. 1. What is the probability that he wandered into Abu Ilan? 2. What is the probability that he is in El Kamin?

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