BYP 9-2 Prasad & Green Inc. manufactures ergonomic devices for computer
Some of their more popular products include glare screens (for computer
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
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
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
could be developed or the company could expand into some other product
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
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
sales. Summary budget information is as follows.
Direct materials $240,000
Direct labor 110,000
Machine repairs 30,000
Sales salaries 50,000
Office salaries 80,000
Factory salaries (indirect labor) 50,000
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
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?