Elliot & Hesse Inc. manufactures ergonomic devices for computer users. Some of its more popular products include anti-glare filters and privacy filters (for computer monitors) and keyboard stands with wrist rests. Over the past 5 years, it 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 ergonomie designs, such as anti-glare filters and wrist rests, already built in. As a result, sales of Elliot & Hesse’s accessory devices have declined somewhat. The company believes that the privacy filters will probably continue to show growth, but that the other products will probably continue to decline. When the next war’s budget was prepared, increases were built into 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 ergonomie 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 anti-glare fitters. 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. 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 Instructions 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?
Elliot & Hesse Inc. manufactures ergonomic devices for computer users. Some of its more popular products include anti-glare filters and privacy filters (for computer monitors) and keyboard stands with wrist rests. Over the past 5 years, it 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 ergonomie designs, such as anti-glare filters and wrist rests, already built in. As a result, sales of Elliot & Hesse’s accessory devices have declined somewhat. The company believes that the privacy filters will probably continue to show growth, but that the other products will probably continue to decline. When the next war’s budget was prepared, increases were built into 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 ergonomie 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 anti-glare fitters. 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. 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 Instructions 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 Summary: The author explains the budgeting process and the implications of reducing the costs.
Elliot & Hesse Inc. manufactures ergonomic devices for computer users. Some of its more popular products include anti-glare filters and privacy filters (for computer monitors) and keyboard stands with wrist rests. Over the past 5 years, it 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 ergonomie designs, such as anti-glare filters and wrist rests, already built in. As a result, sales of Elliot & Hesse’s accessory devices have declined somewhat. The company believes that the privacy filters will probably continue to show growth, but that the other products will probably continue to decline. When the next war’s budget was prepared, increases were built into 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 ergonomie 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 anti-glare fitters. 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.
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
Instructions
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?
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